Canada – The International Franchising Opportunity

WHAT YOU NEED TO KNOW ABOUT DISCLOSURE

Disclosure is the key element of Canadian franchise legislation. Disclosure must be made in one document at one time, and must contain regulated information, not unlike the American experience. In those provinces without franchise legislation, the common law governs. There is no mandated form of disclosure required.

Canadian legislation requires franchisors to disclose all material facts, (ie, facts that would influence whether a particular franchisee would buy a franchise or how much it would pay).

The document must be customised and site-specific. It must tell the prospective franchisee all material facts relating to the specific opportunity being offered to it.

The document must be current as of the date of its delivery.

There is a 14-day cooling-off period before any money can be taken or any agreement relating to the franchise can be signed. Failing to disclose in a timely way or in a proper way gives rise to a statutory right of cancellation or rescission and potential personal liability.

Disclosure may not just be pre-sale. It can also be required on renewal or extension (subject to statutory exemptions).

ADDITIONAL CONCEPTS IN CANADIAN FRANCHISE LEGISLATION

A “franchise” under provincial legislation includes two separate formulations. The first (dealing with business format franchises) entails:

• a right to engage in a business in which the franchisee makes a payment, or series of payments, to the franchisor;
• the franchisee having the right to sell (or offer for sale) goods or services that are substantially associated with the franchisor’s trademark, trade name or other commercial symbol; and
• the franchisor exerting significant control over, or offering significant assistance in, the franchisee’s method of operation.

The second formulation (dealing with business opportunities) captures arrangements where the franchisor grants the franchisee representational or distribution rights (no matter whether a trademark, trade name or other commercial symbol is involved) to sell (or offer for sale) goods or services supplied by the franchisor, or by a supplier that it designates, and where the franchisor or a designated third person provides location assistance to the franchisee, whether by securing retail outlets or accounts, or by securing locations for vending machines, display racks or other product sales displays.

Franchisees have the right of association. Franchisors cannot act or threaten to act in a way that would impact a franchisee’s right to associate with others.

Parties cannot contract out of the law of the province where the franchise is to be operated, or pick a venue for dispute resolution outside of that province.

Both parties to the agreement are subject to the obligation to deal with each other fairly, including acting in good faith to each other and in accordance with reasonable commercial standards.

Franchisors have a limited ability to obtain releases of statutory rights.

TERMINATION

A franchisor may terminate a master, area or unit franchise agreement in accordance with the contractual provisions it negotiated subject to any applicable statutory duty of fair dealing and common law duty of good faith.

Canadian franchise agreements rarely, if ever, include rights for the franchisee to terminate the relationship. Under Canadian common law, a franchisee might terminate the franchise agreement in the event of “fundamental breach” thereof by the franchisor – that is, where the franchisor fails to deliver on its fundamental obligations under the agreement.

RENEWALS

If the franchise agreement does not provide for renewal of the agreement, then on expiry, the franchisor is not required to renew or extend the agreement. The franchisee’s failure to comply strictly with all of the renewal requirements under the franchise agreement will generally entitle the franchisor to refuse to renew the agreement.

TRADEMARKS

Trademarks are controlled federally. A trademark registration in Canada is valid nationally. Franchisors are encouraged to register their marks should they expect to enter Canada; the registration process can begin before a franchisor enters the Canadian market. Canada protects against the registration of international “famous” marks but apart from famous marks there are few restrictions on the registration of marks. The registration process is lengthy but not particularly costly where no oppositions are filed. In Canada, an application must describe the services and goods that word marks and design marks are capable of protecting. New legislation effective from June 2019 adopted the Nice Classification System. A registered mark under the new legislation will be valid for 10 years – a decrease from the previous term of 15 years. If a franchisor can demonstrate that its goods and services are sold in Canada, the party can receive common law protection under passing off laws.

CHANGES IN TRADEMARK REGISTRATION IN CANADA

The amendments also included an expanded definition of a “trademark” that allows registration of various non-traditional marks, such as sounds, scents, tastes and colours. The amendments allow anyone to register a trademark without having used it anywhere in the world. In a “first to file” jurisdiction such as Canada, this option gives foreign trademark owners a competitive edge by preventing others from entering the Canadian market with a confusingly similar mark.

COPYRIGHT

Copyright is an important matter for franchising companies, given the significance of manuals in the operation of their systems. Most franchisors do not seek any specific registration protection for their manuals, although some are available. Copyright protection arises as a matter of law without registration.

FINANCING

Financing for franchisees is available through a federal government small business loan (SBL) programme. With limited personal risk (a guarantee of 25 per cent of the original amount borrowed), SBL financing (to a current limit of $350,000) is available to a franchisee to purchase the assets necessary to build out a franchised unit. The programme is administered by Canadian banks.

METRIC SYSTEM

Canada operates under the metric system.

LANGUAGE LABELLING

Canada has two official languages: English and French. All consumer products (but not signage) must bear French labelling. In Quebec, protective language laws require all signage to be predominately in French. Manuals for use in Quebec must also be translated into French.

CANADIAN ANTI-SPAM LEGISLATION (CASL)

In 2014, Canada introduced important anti-spam legislation that can impact the ability of a franchisor to market to consumers online. This follows previous rules around faxing and telemarketing. Franchisors must take CASL and other marketing-related rules into account when designing their systems for Canada, and may need to modify their practices.

CURRENCY

Canada has a very strong banking sector, which resulted in the most recent recession being a far less dramatic recessionary period than experienced in the US. The Canadian dollar fluctuates around US$0.75.

MONETARY CONSIDERATIONS

Canada does not restrict the ability as a franchisor to patriate earned money in Canada.

TAXATION

Foreign franchisors should consult Canadian tax experts, including with respect to Canadian income tax that may be eligible if the franchisor is found to be carrying on business in Canada. Apart from income tax, fee and royalty payments made by franchisees are generally regarded as being made in respect of services provided by the franchisor in Canada, and so are generally subject to Canadian federal and provincial sales, goods and services or harmonised sales taxes. Where such payments are made to an offshore franchisor, the franchisee is required to withhold and remit to the Canadian federal government withholding tax. The amount of such withholding tax is generally 25 per cent, subject to reduction by any tax treaty in place between Canada and the franchisor’s home country.

Individuals present in Canada for more than 182 days in any year will be deemed Canadian residents and liable for Canadian income tax on their worldwide income for the entire year subject to applicable tax treaties.

HEALTH COVERAGE

Universal public health care is a bastion of the Canadian landscape. Employers pay an employer health tax based on payroll, which contributes to the cost of basic health care.

STRONG TIES TO THE US MARKET

American culture is an indelible part of the fabric of Canadian culture, in large part because 75 per cent of Canada’s population lives within 100 miles of the US border and virtually all Canadians can access American online media and television. Therefore, success of a global brand in Canada is a good predictor of success in American markets, particularly urban ones. Operating in Canada provides an internationally based franchisor with an excellent opportunity to access the vast American market and determine the best places for prospective entry.

CONCLUSION

Canada’s strong and inviting franchise industry will continue to make it the predominant initial place for American franchisors looking to expand internationally, as well as a gateway for international brands looking to enter the North American market.