A non-competition covenant on a Canadian business sale is the seller’s promise, given as part of the deal, not to carry on or work for a competing business within a defined area and time after closing.
Ontario courts apply one overarching test to a sale-of-business non-compete: is it reasonable as between the parties, and not contrary to the public interest? Reasonableness is judged on three axes — duration, geography and the scope of restricted activity — each “justified by the business as it actually was at closing.” Treadstone Law notes Ontario courts “have enforced restrictions of three to five years in business sale contexts,” and, more broadly, that “Ontario courts (and Canadian courts generally) treat non-competition clauses in the commercial sale of a business far more favourably than in the employment context,” since a business seller is typically a sophisticated party paid substantial consideration for the promise.
That favourable treatment has a real statutory limit. Ontario’s Employment Standards Act bans employee non-competes outright, “effective October 25, 2021,” and the ban applies “whether or not it is time-limited or geographically restricted.” Its sale-of-business exception is narrower than most buyers assume: it applies only where “there is a sale or lease of a business or a part of a business that is operated as a sole proprietorship or a partnership” and the seller becomes an employee of the purchaser immediately after. As written, that exception does not name a corporation — the ordinary shape of an Ontario share sale — so a seller staying on as an employee after a share sale should not assume the exception automatically applies; a separate executive exception covers only named C-suite roles. A payment specifically identified as consideration for the non-compete also carries its own tax exposure: Treadstone Law explains it “is often treated as fully taxable ordinary income” rather than getting the more favourable treatment that can apply to proceeds from selling shares or goodwill.
Suppose a sole proprietor sells their bakery for $600,000, agrees to become an employee of the buyer for a two-year transition, and signs a three-year, 25 km non-compete as part of the sale. Because the business was a sole proprietorship and the seller became an employee of the purchaser immediately after closing, the ESA’s sale-of-business exception applies and the statutory ban does not void the clause. Now suppose the same seller instead sold the shares of an incorporated bakery: because the exception names only sole proprietorships and partnerships, the parties cannot rely on it with the same confidence, and would need to confirm the seller’s footing under the executive exception or accept the added uncertainty.
See also: Non-solicitation covenant, Survival period
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