FRANCHISING IN CANADA – TIPS FOR INBOUND FRANCHISORS

Franchising in Canada – Tips for Inbound Franchisors

Canadian Market[1]

Franchising is healthy and expanding in Canada.  If you are a foreign franchisor considering an expansion to Canada, reading this article will provide you with good, basic information.

In Canada, an estimated 1,300 franchise brands are operating and approximately 1 in every 14 Canadians is directly or indirectly involved in the franchise industry.  Canadian franchising generates about $68 billion in annual revenue.

Canadian Franchise Association1 (“CFA”)

CFA is the recognized authority on franchising in Canada and was founded 50 years ago.  CFA’s paid members represent 750 brands and over 40,000 franchised outlets across the country. Joining CFA is a solid investment for franchisors, franchisees, professional advisors and suppliers.  View www.cfa.ca for the benefits of membership.

Some of the Essentials of Canadian Franchising

Any foreign franchisor intending to expand its system to Canada must deal with the following matters:

  • Registration of Trade-mark(s) – As a first step, apply to register a word mark and, if possible, a logo or design mark in Canada under the federal Trade-marks Act. Canada has a single, federal trade-mark registration system.  A registered Canadian trade-mark is enforceable across all of Canada.  Only a Canadian registered mark provides this protection; a foreign registration does not.
  • Franchise Disclosure Document (“FDD”) – There is no statutory form of FDD required by franchise legislation in any of the 6 of 10 Canadian legislated provinces, namely (from west to east), British Columbia, Alberta, Manitoba, Ontario, New Brunswick and Prince Edward Island. Canada has no federal franchise statute.  Franchisors are not required to register in any province and no statutory authority exists to approve franchise documents.  It is left to each franchisor and its lawyer to draft a FDD and franchise agreement (“FA”) that comply with the franchise legislation of each province where the franchisor wishes to sell franchises.  If a franchisor wishes to sell franchises nationally, a national form of FDD can be prepared.
  • Pre-FA Contract(s) – Most of the provincial franchise statutes allow a franchisee to sign one or more pre-franchise agreement contracts providing for payment of a fully refundable deposit up to 20% of the initial franchise fee, designating a location and/or a protected territory and a confidentiality covenant.
  • Delivery of FDD – Each prospective franchisee must receive a FDD 14 clear days before a franchise agreement may be signed.
  • Some Disclosure Requirements – A FDD is required to provide disclosure of all “material facts”, including a franchisor’s latest annual financial statements and copies of all FA-related contracts, as well as lists of its existing and closed franchises. A Certificate of Franchisor signed by two of its directors or officers must be attached.  The signatories and the franchisor itself will be liable, jointly and severally, for any misrepresentation(s) – errors or omissions – related to the FDD.
  • Registration of Franchisor – Although none of the provincial franchise statutes requires a franchisor to register as such (nor is any governmental vetting of franchise documents required), if the franchisor is “carrying on business” in a province, basically by having an office or an employee or agent there, then it must register in that province as an “extra-provincial corporation” and must file simple-form annual reports.
  • Franchise Agreement (“FA”) – Usually, most provisions of a FA prepared in the franchisor’s home jurisdiction can be used in a Canadian form of FA. Otherwise, the existing form of FA  will require revisions to become “Canadianized” for use in Canada.  Some revisions include:
  • Spelling – Numerous English words are spelled differently in Canada. For example: favour, cheque and labour.
  • Fair dealing – Statutory obligations of “fair dealing” and “good faith … in accordance with reasonable commercial standards” means that most absolute discretions given to a franchisor must be revised (e.g., substitute “reasonable discretion”).
  • Post-term non-competition covenants – to be enforceable in Canada, they must go no further than reasonably necessary to protect the essential elements of the franchise system.
  • Employees – Add a confirmation that the franchisee is solely responsible for recruiting, hiring, compensating, training, disciplining and terminating its employees. To avoid a potential “co‑employer” designation whereby the franchisor could be deemed jointly liable for employees of the franchisee, the franchisor must abide by this confirmation and remain “hands off” of such matters, leaving them entirely to the franchisee.
    • Security Agreement – If the franchisor or its designate is to supply substantial assets or inventory (or both) on credit, then a Canadian form of Security Agreement should be exhibited to the FA, signed concurrently and registered in the Personal Property Registry (-ies) where the franchisee involved will do business.
    • Tax Matters – Whether to establish a Canadian subsidiary to manage the Canadian operation or directly franchise from the home jurisdiction, withholding tax, sales taxes, employee remittances are most of the tax matters.
    • Location and Territory – These must be settled. Often, a map outlining an exclusive territory of the franchisee is exhibited to the FA.
    • Currency– A provision must be added to confirm which type of currency will govern and, if not Canadian currency, then currency exchange must be dealt with.
    • Immigration – If one or more employees of the franchisor are to move to Canada to manage the franchisor’s Canadian operation, appropriate Canadian visa(s) will be required.
    • Governing Law – All of the provincial franchise statutes require that the laws of the province of operation of the franchisee govern the franchise relationship and that the courts of such province have exclusive jurisdiction to hear disputes under the franchise legislation.
    • Termination – Again, the franchise statutes in Canada require “fair dealing” and “good faith” in the performance and enforcement of a FA. Therefore, termination provisions should be fair, including, whenever reasonable, time given to a franchisee to cure a default.
  • Advertising Fund – Disclosure of a franchisee’s required contribution to an advertising fund and the administration of the fund must be made. Generally, Canadian franchisees will want any advertising fees to be used in Canada.
  • Training – Program, place and costs to be disclosed.
  • Operations Manual – Revise to comply with Canadian requirements.
  • Dispute Resolution – A mediation and an arbitration provision may need t be included.

Privacy Legislation and CEMs

Privacy legislation exists throughout Canada.  It prevents anyone from using personal information without consent.  “Commercial electronic messages” (emails) may not be sent to persons without consent.  Corporations need to publish privacy policies and have a privacy officer.  Particularly sensitive information includes medical history, banking and financial transactions.  Sometimes a consent form can be included in an initial information form.

Franchise Lawyer

It is important for a franchisor expanding its system to Canada to engage the services of a Canadian lawyer well-experienced and current in the franchise laws of Canadian provinces and the preparation of the documents mentioned, as well as trademark registration.

PLEASE NOTE:  This paper is not to be taken as actual legal advice.  It only provides an overview of some of the more important details of expanding a franchise system to Canada.  Legal advice will only be given pursuant to a formal engagement letter providing for advice and documents to be prepared for a specific franchise system.

[1] Statistics provided in CFA’s 2018 Policy Briefing.

This paper has been prepared by:

John L. Rogers, Canadian Franchise Lawyer
www.likewise.law
john@likewise.law
604.209.6451