Non-Non-Competition Covenants in Canada: What They Are and Whether They Are Enforceable
A non-competition covenant (commonly referred to as a non-compete clause) is a contractual provision that prevents one party from competing with another for a specific period and within a defined geographic area. These clauses commonly appear in employment agreements, agreements of purchase and sale of a business, and shareholder or partnership agreements.
Historically, courts treated non-compete clauses as unlawful restraints on trade. Over time, Canadian courts, particularly in Ontario, shifted toward a reasonableness standard, enforcing non-competes only when they are narrowly tailored and protect legitimate business interests.
Key Requirements for Enforceability
Courts will only enforce a non-competition covenant if it meets the test of reasonableness. The following elements are central to that analysis.
1. Temporal (Time) Limits
The timeframe must be no longer than necessary to protect the party’s interests. In many commercial contexts, anything beyond five years is considered excessive and likely unenforceable.
2. Geographic Scope
The restriction must reflect the actual market in which the business operates. Courts routinely strike down clauses attempting to prohibit competition on a national or global scale. Reasonable examples include a radius of several kilometers or specific municipalities within the Greater Toronto Area (GTA), such as Toronto, Mississauga, Brampton, Markham, or Richmond Hill.
3. Legitimate Business Interest
A non-compete must protect a genuine commercial interest, such as business goodwill, confidential information, or long-standing customer relationships. Non-competes cannot be used solely to eliminate competition.
Importantly, if the clause is overly broad in duration or geography, courts generally strike the entire covenant rather than rewrite it.
Enforceability in the Employment Context
In Ontario, the enforceability of non-competition clauses in employment agreements was significantly curtailed by the Working for Workers Act, 2021 (Bill 27), which amended the Employment Standards Act, 2000 (ESA) by adding section 67.2. This provision prohibits employers from entering into employment contracts that contain a non-competition clause, with one narrow exception: where the non-competition agreement is entered into in connection with, or as part of, the sale of a business, and the person who sold the business becomes an employee of the purchaser.
Outside of that specific context, non-competition clauses in Ontario employment agreements entered into on or after October 25, 2021 are void and unenforceable as a matter of statute, regardless of whether they would otherwise satisfy the common law reasonableness test.
Even for agreements predating October 25, 2021, Canadian courts, and especially Ontario courts, have historically been reluctant to enforce employment-based non-competes, due to the inherent power imbalance between employers and employees, the potential restriction on an individual’s ability to earn a livelihood, and the availability of less-restrictive alternatives such as non-solicitation clauses or confidentiality agreements.
Employees remain prohibited from retaining employer documents or misusing proprietary information, but they may rely on general skills and knowledge gained in the ordinary course of employment.
For further reading on workplace restrictions, see Kalfa Law Firm’s guide on Employment Law Services.
Enforceability Between Buyers and Sellers of a Business
Non-competition covenants are most commonly upheld in the context of the purchase or sale of a business, where the buyer pays for the business’s goodwill, the parties negotiate at arm’s length, the stakes are commercial rather than personal, and both sides have relatively equal bargaining power.
Without a non-compete, a seller could open a competing business immediately after closing and divert loyal customers, undermining the transaction’s value. Similarly, non-competition clauses in shareholder agreements and partnership agreements are often enforceable because the parties typically have access to sensitive, commercially valuable information.
For clients exploring M&A transactions, see our related resource: Mergers and Acquisitions in Canada.
Indirect Strategies for Increasing Compliance
Businesses can increase the likelihood that individuals comply with a non-compete by tying certain benefits to ongoing adherence. Common strategies include conditioning deferred compensation or retirement benefits on non-competition and structuring buyout payments in installments that cease if the individual competes.
While courts still scrutinize these provisions for reasonableness, such mechanisms may add practical leverage in enforcing compliance.
Bottom Line
Non-competition covenants can be enforceable in Canada, but only when they are narrowly drafted, reasonable in scope, necessary to protect legitimate business interests, and negotiated with balanced bargaining power, as is typically the case in commercial transactions.
If you are drafting, negotiating, or reviewing a non-competition covenant, whether for an employment agreement, shareholder arrangement, or business purchase, seeking legal advice is essential to ensure the clause is enforceable and aligned with Ontario law.
If you need guidance on drafting or reviewing a non-competition covenant, or if you are facing a dispute regarding enforceability, Kalfa Law Firm can help. Our experienced business and employment lawyers serve clients across the GTA, including Toronto, Mississauga, Brampton, Oakville, Whitby, and surrounding areas.
Contact Kalfa Law Firm today to book a consultation. Your business and your rights deserve clarity and protection.
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Ocean Enbar, Summer Law Student, JD Candidate
Ocean Enbar is a JD candidate and summer student at Kalfa Law Firm. Ocean assists our corporate, commercial, and tax lawyers in preparing research memoranda, conducting due diligence, drafting letters, and tending to the general corporate needs of our clients. Ocean completed his honours political science degree at Western University. He then worked as an intern on parliament hill until he transitioned to the private sector, interning for a reputable international lobbying firm.
© Kalfa Law 2021. Updated July 2026
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.
