Canada: Make Sure The Financial Statements You Prepare For Franchisors Meet The Necessary Requirements

Last Updated: September 29 2015
Article by Andréa Brinston

Since the introduction of the Arthur Wishart Act (Franchise Disclosure), 2000 (Ontario) (the "Act"), franchisors looking to set up franchises in Ontario have had to learn to prepare their franchise disclosure document ("FDD") with great care and detail. Otherwise, they run the risk of a potentially unhappy franchisee exercising one of its rights of rescission found under section 6 of the Act. A successful rescission claim effectively allows a franchisee to get out of the franchise agreement that they previously agreed to be bound by and recoup their investment.

Over the last 15 years many legal professionals who provide advice to franchisors have had to get up to speed with the provisions of the Act, related disclosure regulations and the case law that has arisen to establish general principals in respect of franchisor disclosure requirements. That way, they can better assist their clients with interpreting the Act and regulations. However, I suspect that very few accountants have gone to similar lengths to determine what issues may be linked to the financial statements their franchisor clients provide to potential franchisees. This newsletter will help accounting professionals better understand how they can ensure that the product of their relationship with a franchisor does not end up being the root cause of a franchisor's demise.

Required Standards of Financial Disclosure

One of the most important factors for prospective franchisees to consider when making its decision to become a franchisee of a franchise system is the financial health and viability of the franchisor itself. The Act together with its regulations requires a Franchisor, unless it meets one of the financial disclosure exemptions set out in section 11 of the regulations, to provide:

(i) an audited financial statement for the most recently completed fiscal year of the franchisor's operations, prepared in accordance with generally accepted auditing standards that are at least equivalent to those set out in the Canadian Institute of Chartered Accountants Handbook; or

(ii) a financial statement for the most recently completed fiscal year of the franchisor's operation prepared inaccordance with GAAP that is at least equivalent to the review and reporting standards applicable to review engagements set out in the Canadian Institute of Chartered Accountants Handbook.

Case law over the last decade has determined that "notice to reader" is not an acceptable standard for financial statements under the Act's requirements. Courts have also confirmed that internally prepared statements, or simply showing or printing a prospective franchisee information from QuickBooks or other accounting software programs, is not acceptable.

Additionally, stale financial statements, even if prepared in accordance with the standards in (i) or (ii) above, will not meet the requirements under the Act. However, if 180 days has not yet passed since the end of the most recent fiscal year and the financial statements are not yet ready, section 3(2) of the regulations states that the FDD shall include financial statements from the previous year as long as they meet the audit or review engagement standard set out in (i) or (ii) above. For a new start-up franchisor that has operated for less than one fiscal year, or if 180 days has not passed since the end of the first fiscal year and the financial statements are not yet prepared, section 3(3) of the regulations states that the franchisor shall provide an opening balance sheet for the franchisor in the FDD.

Exemptions to Providing Financial Disclosure

If your franchisor client is a large, well-established franchisor that has numerous franchise locations, there may be an exemption under the Act and regulations that allows the franchisor to be exempt from the financial statement disclosure requirements. Section 11(1) of the regulations sets out a number of criteria that a franchisor must meet to be exempt.

The first of the criteria deals with franchisors that have a net worth of at least $5,000,000 (or $1,000,000 if it is controlled by a corporation whose net worth is at least $5,000,000). The second deals with the number of franchise locations that the franchisor (or the franchisor and the corporation that controls the franchisor) has had over the last five years, being at least 25 locations in Canada or at least 25 locations in one other jurisdiction other than Canada. The third requires that the franchisor (or the corporation that controls the franchisor) has been engaged in the line of business associated with the franchise continuously for no less than five years preceding the date of the FDD. The last requires that the franchisor has not had a judgement, order or award made in respect of fraud, unfair or deceptive practices or a law regulating franchises (including the Act and its regulations), such judgement, order or award being made against it in Canada or in another jurisdiction that it relies on in respect of meeting the second requirement.

It appears the justification for these exemptions from providing financial statements are based on the idea that franchisors who meet all 3 of the criteria should be financially sound and have substantial resources, making it less likely that they will go under or default on obligations to their numerous franchisees. Interestingly though, there are no exemptions from financial disclosure under the legislation and regulations in the United States that govern disclosure from franchisors to franchisees.

Timing Consideration relating to the Delivery of the Financial Statements

As briefly touched upon above, the Act requires that the completed financial statements for any fiscal year be ready for disclosure in an FDD no later than 180 days following the fiscal year end. If a franchisor's statements are not ready 180 days following the end of the fiscal period and the franchisor simply includes the previous year's statements, those statements will be considered stale and not meet the requirements of the Act and regulations. This can result in a court finding that the financial disclosure for the franchisor is deficient and will likely lead to a franchisee being able to exercise one of its rights of rescission.

Additionally, the Act requires that the FDD be delivered to the prospective franchisee in one document no less than fourteen days before the franchisee signs any agreement or makes any payments in respect of the franchise. This means that a franchisor is not allowed to deliver an FDD that does not contain the financial statements with the idea that it will get the fourteen day time period to start running, only to deliver the financial statements a couple of days later when the accountant has them finalized. To avoid any of these issues, the franchisor and its accountant must work closely and keep each other informed as to when statements will be ready and when the franchisor is looking to deliver an FDD.

Earnings Projections

Although the Act does not require a franchisor to provide an earnings projection or an estimate of annual operating costs as part of the FDD, if the franchisor decides to provide these items to a prospective franchisee at any time (not just as part of the FDD), the franchisor must follow the requirements set out in items 2 and 3 of section 6 of the regulations. As the accountant of a franchisor, you will likely be asked to assist with putting together or reviewing such projections or estimates. If this is the case, you should be aware that the franchisor must provide: (i) a statement specifying the basis for the estimate of operating costs and the assumptions underlying the estimate; and/or (ii) the reasonable basis for each projection and the assumption underlying the projections. Additionally, the franchisor will need to provide a location where information is made available for inspection in respect of such estimates or projections.

Note that neither the Act nor the regulations stipulate that an earnings projection or estimate has to be provided in writing to be caught by the requirements. Therefore, oral statements made by a franchisor, franchisor's associate or agent to a potential franchisee may trigger certain disclosure requirements. Be sure to ask your franchisor client about what its associates and agents are telling prospective franchisees in respect of earnings projections and estimates for costs during the sales process. You will need to make sure your client includes this information in the FDD and ensure that the necessary assumptions and information are also included and made available. If possible, it would be a good idea for you to work with your franchisor clients in developing the information that is being used by those that are trying to sell franchises to potential franchisees.

Courts have found that the basis for estimates and projections are highly relevant for a prospective franchisee trying to evaluate its investment decision. Not providing all of the requirements under the Act and regulations will likely lead to a finding that the FDD is deficient and the franchisee will be allowed to exercise one of its rescission rights.

The Remedy of Rescission

Sections 6(1) and 6(2) of the Act provide for two different rights of rescission: (i) the first being a right the franchisee may exercise within 60 days of receiving the FDD if the FDD was not delivered at least fourteen days before the franchisee signed an agreement or provided any payment in respect of the franchise, or if the contents of the FDD did not meet the requirements of section 5 of the Act, and (ii) the second being a right the franchisee may exercise no later than two years after entering into the franchise agreement if the franchisor never provided the FDD.

Case law has demonstrated that the courts have strictly adhered to the wording of the Act and regulations when determining whether financial statements delivered by a franchisor meet the requirements. Failing to deliver financial statements or failing to deliver financial statements that meet all the prescribed requirements has generally been found to be a fatal deficiency. Courts have concluded that such a flaw can disqualify the delivery of the FDD and allow a franchisee to apply for the remedy of rescission within two years of entering into the franchise relationship instead of only within the 60 day timeframe of receiving the FDD.

Consequences of Rescission

If a franchisee is successful in exercising one of its rights of rescission under either section 6(1) or 6(2) of the Act, the franchisor (or franchisor's associate), within 60 days of the exercise of rescission, shall be required to: (a) refund any monies received from or on behalf of the franchisee (other than money for any of the items set out in (b) or (c) below); (b) purchase back from the franchisee any inventory that the franchisee purchased pursuant to the franchise agreement and is remaining at the effective date of rescission (at the same price as paid by the franchisee); (c) purchase back from the franchisee any supplies and equipment that the franchisee purchased pursuant to the franchise agreement (at the same price as paid by the franchisee); and (d) compensate the franchisee for any losses incurred by the franchisee in acquiring, setting up and operating the franchise (minus any amount already accounted for in (a), (b) or (c)).

The four obligations mentioned above (which are set out in more detail in section 6(6) of the Act), being to refund and repurchase inventory, supplies and equipment from the franchisee are not only obligations of the franchisor; these obligations also extend to the franchisor's associates. A franchisor's associate is defined to include, among others, someone who, directly or indirectly, controls the franchisor as well as someone that is directly involved in the grant of the franchise. This means that owners, directors and officers of a franchisor client may also be found to be personally liable for compensating the franchisee under section 6(6).

It is worth pointing out that a rescission right exercised by a franchisee based on a defect in the financial disclosure provided (or not provided) by the franchisor usually falls under the two year rescission right of section 6(2) and likely comes with a higher price tag for the franchisor and its associates to pay, given that there could be more expenses and more losses associated with operating a franchise for almost two years as opposed to 60 days. Courts have determined that the franchisee does not have to suffer any losses while operating the franchise for the franchisee to be able to exercise its rights of rescission. Additionally, neither the franchisor nor any of the franchisor's associates are entitled to any discount or offset in respect of profits made by a franchisee exercising such rights.

How to Add Value for the Franchisor Client

Accountants providing advice to franchisor clients can add additional value to their client relationships by ensuring their franchisor clients are aware of the required reporting standards for financial statements under the Act and regulations, understanding the timing issues that their franchisor clients face and working to meet the deadlines under the Act for completing the most recent fiscal year-end financial statements. Accountants should also work closely with any franchisor clients when they are preparing operating cost estimates and earnings projections, ensuring the franchisor client is using reasonable assumptions and also documenting such assumptions properly in the FDD.

Accountants are not the only professionals that franchisors need to work closely with in preparing and keeping the FDD up-to-date. However, it has been well documented in case law that errors in providing financial disclosure to a prospective franchisee are generally fatal to the assertion of a franchisor that it has fulfilled its obligation to provide an FDD. Having a handle on the requirements related to financial disclosure in the Act and the regulations will help an accountant ensure that it is not his or her work product or advice that has potentially subjected the franchisor to an expensive claim for rescission by an unhappy franchisee.

Pallett Valo LLP Business Law Practice Structuring your business, and business proposals, for success requires the right partnerships and specialized expertise. At Pallett Valo, we represent both growth businesses and established enterprises in all sectors. Our specific legal knowledge and wide-ranging experience will empower your business decisions - enabling you to act with confidence and decisiveness to take advantage of all opportunities. We bring a rarely-found enthusiasm, creativity and cost-effectiveness to both your day-to-day legal requirements and more complex strategic legal needs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.