The client
A former furniture-manufacturing entrepreneur near Victoriaville bought a $295,000 home, his income built from a new consulting practice plus the fixed annual non-competition payments still owed under the agreement that sold his prior company.
Purchase price
$295,000, Victoriaville
Non-competition payments
$3,400/month
Contractually fixed, 3 years remaining
New consulting income
$4,900/month
Down payment
$59,000 (20%)
The problem
A restrictive covenant payment -- most often a non-competition or non-solicitation payment tied to a business sale -- is taxed by default as fully ordinary income under Income Tax Act section 56.4, unless the seller and buyer, dealing at arm's length, jointly elected otherwise at the time of sale. No such election had been filed here, so the payments are ordinary income on his T1, exactly as stable and exactly as documented as any other income line.
Why the tax treatment wasn't actually the hard question
- ▸The payments were fixed by contract at $3,400/month, paid without interruption every year since the sale -- reliable, ordinary income with a clean paper trail
- ▸The sale agreement's non-competition clause, however, had a five-year term, with three years remaining at the time of the mortgage application
- ▸Unlike his consulting income, which could reasonably continue indefinitely, this income source had a known, contractual expiry date built into the same document that created it
Averaging it into a standard self-employed income review would have missed the one fact that actually mattered: it stops.
The numbers
Once the covenant's remaining term was confirmed, sizing the purchase around both income sources was straightforward arithmetic.
| Combining a finite income source with an ongoing one | Amount |
|---|---|
| Non-competition payments (3 years remaining) | $3,400 |
| New consulting income (ongoing) | $4,900 |
| Combined qualifying income | $8,300 |
| Total debt service | Figure |
|---|---|
| Payment at the qualifying rate (6.75%), 25 years | $1,617/mo |
| Property tax | $220/mo |
| Heat (lender estimate) | $90/mo |
| Car loan | $215/mo |
| Total debt service | 25.8% |
25.8% is informational on this uninsured purchase. With his consulting practice's own income covering the mortgage comfortably on its own, the lender counted the finite non-competition payments in full for the qualifying period while flagging their expiry for the file, rather than declining to count them at all.
The solution
A courtier hypothecaire licensed under Quebec's Act respecting the distribution of financial products and services treated the covenant's remaining term as the real underwriting question, separate from whether the income itself was well-documented.
First, obtained the original business sale agreement and confirmed no restrictive-covenant election had been filed, establishing the payments as ordinary income under section 56.4, exactly as reported on his T1.
Second, confirmed the covenant's own remaining term directly against the sale agreement's dates, a different kind of rebuild from an unusable-year problem, finding three years left on the original five-year clause.
Third, sized the file so his new consulting income alone could reasonably carry the mortgage, counting the non-competition payments as real, current support without relying on them past their known expiry.
The outcome
The purchase funded at 4.75%, qualified on the combined $8,300/month, with total debt service at 25.8% and the non-competition income's three-year remaining term noted for the file.
Because this file is an uninsured purchase, CMHC's ratio maximums do not apply directly; the 25.8% figure is informational.
What to take from this file
- 01A restrictive covenant payment is ordinary income by default under ITA s.56.4, unless an arm's-length election was filed at the time of sale. Confirm whether one exists before assuming either tax treatment.
- 02Check the covenant's own remaining term against the sale agreement. A contractually finite income source needs different treatment from one that can reasonably continue.
- 03Well-documented income and permanent income are two different questions. This income was both stable and reliable, and still had a known expiry date.
- 04Where a finite income source exists alongside an ongoing one, structure the file so the ongoing income can carry the mortgage on its own. That protects the client well past the covenant's own end date.
Sources
Every regulatory figure in this file traces to one of these primary sources. Client details and anything that varies by lender are illustrative, as flagged below.
- ▸OSFI — Minimum qualifying rate for uninsured mortgages — the minimum qualifying rate — greater of contract rate + 2% or 5.25%.
- ▸Provincial/territorial mortgage-broker legislation fetched directly (bclaws.gov.bc.ca, legisquebec.gouv.qc.ca, fcaa.gov.sk.ca, web2.gov.mb.ca, nslegislature.ca, assembly.nl.ca) plus FCNB's own site for NB and CanLII's index for PE — see notes for per-province method — provincial mortgage regulators and licence titles.
Illustrative in this file — lender-specific, not rules:
- ▸4.75% contract rate — rates move daily; not a quote.
- ▸the $3,400 non-competition payment and $4,900 consulting income — set by this individual's own sale agreement and new practice; not a formula.
- ▸the TDS figure — this file is an uninsured purchase, so there is no CMHC ratio ceiling -- the number is informational.
Authority & provenance
How this case file was built
We publish the origin, the verification method and the reviewer for every case file, so you can judge how far to trust it before you rely on it with a client.
Where it comes from
Derived from files handled by Treadstone’s fulfillment desk and from scenarios contributed by partner brokerages. Names, employers, exact amounts and dates are changed so no client or file is identifiable.
Provenance: Composite — a pattern seen repeatedly on fulfilled files, not a single transaction.
What is verified
Every regulatory figure traces to a primary source listed above and was checked against it on the date shown. The arithmetic is recomputed by machine on every rebuild.
Anything that varies by lender is labelled illustrative rather than stated as a rule.
Who reviewed it
Reviewed for Canadian regulatory accuracy before publication, and re-checked whenever a cited rule changes.
Reviewed by: Nicholas Parson, Treadstone Associates — reviews every case file before publication.
This case file is professional reference material for licensed mortgage professionals. It is not advice to a borrower, and it is not a lender commitment. Insurer rules, qualifying rates and provincial taxes change — confirm the current position with the insurer, regulator or lender before you rely on any figure here in a live file.