This is the fifth of a series of articles dedicated to tax
considerations of shareholders' agreements for private
corporations. The focus is on the tax implications of
non-competition covenants in a shareholders' agreement that
could be triggered upon the departure of a shareholder.
Tax implications of a restrictive
covenant
A shareholder might end his or her involvement with the business
for various reasons, such as a dispute with fellow shareholders, a
marriage breakdown, insolvency or simply a desire to pursue other
activities. Whatever the reason, it is common for a
shareholders' agreement to stipulate that a shareholder's
departure will trigger the sale of his or her shares to the company
or the remaining shareholders. Provisions dealing with the sale may
restrict the departing shareholder's right to compete with the
business for a period. Normally, these "non-compete"
provisions are intended to support the value of the shares by
preserving the business'
