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ARTICLE · 07 FEBRUARY 2020

FCA Confirms That An Inducement Is Taxable As A Restrictive Covenant Payment

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The Federal Court of Appeal has upheld the decision of the Tax Court of Canada (2018 TCC 158, Smith J.), confirming that a payment made to induce a party to sign a share purchase agreement

CanadaTax
James G. Morand
James G. Morand
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The Federal Court of Appeal has upheld the decision of the Tax Court of Canada (2018 TCC 158, Smith J.), confirming that a payment made to induce a party to sign a share purchase agreement was subject to withholding tax under Part XIII of the Income Tax Act (Canada). If structured differently, the payment might have escaped the Canadian tax net.

Facts

Pangaea was one of three shareholders of Public Mobile Holdings Inc. ("Public") and party to a unanimous shareholders' agreement that prohibited the other Public shareholders from selling their shares without Pangaea's consent.

Telus Communications offered to buy Public in 2013 and Thomvest, one of the other Public shareholders paid Pangaea $3 million pursuant to a letter agreement under which Pangaea agreed to execute a share purchase agreement with Telus.

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