Canada: Franchising Comparative Guide

1 Legal and enforcement framework

1.1 Which legislative and regulatory provisions govern franchising in your jurisdiction?

There is no federal franchise legislation in Canada, as the regulation of franchising falls within the provincial jurisdiction. To date, six Canadian provinces have enacted franchise statutes and respective regulations: Alberta, British Columbia, Manitoba, New Brunswick, Ontario and Prince Edward Island (the 'disclosure provinces'). These franchise statutes (collectively, the 'Franchise Acts') are fairly harmonised, but not identical.

The province of Quebec does not have franchise-specific legislation. However, the Civil Code of Quebec governs many aspects of the franchise relationship, including pre-contractual disclosure, the duty of good faith, contracts, security interests and leases.

Depending on the industry in which the franchise concept operates, various federal, provincial and municipal rules may apply, such as import restrictions on dairy products, food labelling and calorie disclosure requirements, and waste disposal and professional certification requirements.

1.2 Do they apply to foreign franchisors entering your jurisdiction or only to domestic franchises?

The provincial Franchise Acts apply equally to domestic and foreign franchisors.

1.3 Do any special regimes apply in specific sectors?

Some sectors of the economy have rules and restrictions that should be noted by franchisors. For example, imports of milk, cheese, eggs and poultry to Canada are controlled through quotas and high tariffs. Franchisors in the food and restaurant industry may need to revise their supply chains if they rely on these products in their menus.

The sale of alcohol is under strict provincial control in Canada. Franchisees may need to go through a lengthy process to obtain all required alcohol licences for their establishments.

1.4 Which bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?

There is no federal or provincial government body responsible for the enforcement of the Franchise Acts. The statutory rights granted by the Franchise Acts are enforced by the courts.

1.5 What is the regulator's general approach in regulating the franchise sector?

There is no regulator of the franchise sector in Canada.

1.6 Are there any trade associations for the franchise sector? If so, what are the conditions for membership? What are the commercial implications of not being a member?

The Canadian Franchise Association (CFA) is a national trade association that represents both franchisors and franchisees. Membership is not mandatory. The CFA:

• provides educational services and various resources for its members;
• advocates before the federal and provincial governments on behalf of the franchise industry; and
• provides lead generation and promotional opportunities.

Members of the CFA are expected to comply with its Code of Ethics, which promotes compliance with good disclosure practices and adherence to non-discriminatory practices.

In Quebec, which is predominately francophone and culturally distinct from other Canadian provinces, the Quebec Franchise Council is a provincial association representing the franchise industry.

2 Franchise market

2.1 How mature is the franchise sector in your jurisdiction?

The Canadian franchise sector is quite mature. Canada has the second-largest franchise industry in the world, contributing about C$96 billion to the economy every year and employing one out of 10 working Canadians. More than 75,000 franchise units operate throughout Canada.

There is an extensive network of suppliers that support the franchise industry, including financial services, legal services, franchise consultants and brokers. Canadian banks have established specialised franchise departments to handle financing for start-up franchised businesses.

2.2 In which sectors is franchising most common?

According to the Canadian Franchise Association (CFA), there are an estimated 1,300 franchise brands operating in Canada in most sectors of the economy, including the restaurant, automotive, hospitality, real estate and professional services industries and many others. Top franchise industry sectors include food services, hospitality, real estate and business services, commercial and residential services, arts and health and fitness.

2.3 Who are the biggest and most successful franchisors in your jurisdiction? How are they typically structured?

The largest Canadian franchisor is Tim Hortons, a domestically grown fast-food restaurant concept known for coffee and doughnuts. In 2014, it was acquired by Restaurant Brands International. Other big Canadian franchisors include Pizza Pizza, Mr. Lube, Marlin Travel and Pet Valu. Some of the major international franchisors include Subway, McDonalds, Circle K, Jani-King, RE/MAX, KFC and Dairy Queen.

Domestic franchisors in Canada grew primarily through unit franchising. Master franchising is also used, but currently the majority of US brands are growing in Canada through unit franchising.

3 Franchising models

3.1 Is master franchising or the multi-unit development model most common in your jurisdiction? Is there a perceptible trend in one direction or the other?

Master franchising and development arrangements are quite common, particularly when expanding into Quebec. Because of the distinct culture, mixed common law and civil law system, different consumer tastes and mostly French-speaking population in Quebec, both Canadian and international franchisors often adopt some variation of a development arrangement using a developer familiar with the region and fluent in French when doing business in this province.

'Master franchising' is generally understood in Canada as an arrangement in which the franchisor grants the master franchisee the right to sub-license the brand to local candidates and act as a sub-franchisor within a specific area, either exclusive or non-exclusive. Often, the master franchisee is required to open one or more 'pilot' locations before being able to sub-franchise.

An alternative to master franchising is the area development or the area representation model. These terms are often used interchangeably, but generally:

• 'area development' refers to an arrangement where the developer is granted rights to open a number of units in a specific region; and
• the 'area representation model' usually involves an area representative acting as a scout to find, train and/or supervise potential franchisees, who will then contract directly with the franchisor.

In other words, an area developer is usually a multi-unit franchisee that agrees to open a certain number of units within its region following a development schedule; while an area representative is a sales agent that neither operates units itself nor has the right to sub-franchise. A combination of area development and area representation models is also possible.

Other than in Quebec, there is no perceptible trend in one way over the others. Each franchise system needs to assess the options and carefully select its development model.

3.2 What other models of franchising are commonly used in your jurisdiction?

Unit franchising is very popular with Canadian and international franchisors. Franchisors from the United States often start their international expansion by crossing the border into Canada through unit franchising, because the business environment, culture, legal system and consumer preferences in Canada are similar to those in the United States.

Joint venture franchising can also be used, but is less popular than unit franchising, master franchising or the development models.

3.3 What are the potential advantages and disadvantages of these different models in your jurisdiction?

The master franchising model has the advantage of having a local partner in Canada that is familiar with the market and will support franchisees on the ground. With a carefully selected master franchisee and a properly drafted master franchise agreement, the franchisor can achieve a balance between keeping control over the brand standards and development and adapting the system to local requirements. However, the franchisor will have to give up a share of profit and at least some degree of control when using the master franchise model.

The unit franchising model gives the franchisor more control over the system expansion and adaptation in Canada and avoids the need to use intermediaries. It is easier to set up and wind down than a master franchise relationship; but unit franchising will require more time and resources to manage from the franchisor's headquarters and generally offers slower growth than master franchising or the development models.

Different variations of the development model (area development, area representation or a combination of both) can be used to offset the particular franchisor's weaknesses (eg, the lack of familiarity with the market) and leverage the system's strengths to balance the risks and benefits of expansion to Canada. For example, using an area representative to find, train and supervise Canadian franchisees can give a foreign franchisor 'boots on the ground' while maintaining contractual privity with the individual franchisees.

Canadian legal system allows the franchisor significant flexibility in structuring its expansion to Canada.

3.4 What specific considerations should be borne in mind in the case of cross-border franchising into your jurisdiction?

Foreign franchisors should keep in mind that Canada is a large country, but the majority of the population is concentrated in the southernmost part along the border with the United States. In addition, Canada should not be viewed as a single, homogeneous market. Instead, it is prudent to divide Canada into several distinct regional markets:

• Western (British Columbia);
• the Prairies (Alberta, Saskatchewan, Manitoba);
• the Atlantic provinces (Newfoundland and Labrador, New Brunswick, Prince Edward Island and Nova Scotia);
• Quebec;
• Ontario; and
• the North (Yukon, Northwest Territories and Nunavut).

If using the master franchising or the development model, giving away exclusive rights to the whole country to a single entity should generally be avoided, unless the candidate truly has the financial strength and experience to work in all regions.

In addition to the supply chain issues mentioned in question 1.3, franchisors should consider the peculiarities of the real estate market in Canada. Most of the prime commercial and retail premises are concentrated in the hands of a few large landlords. Before the COVID-19 pandemic, because of low vacancy rates in large urban centres, it was challenging to secure a good location for a franchised unit, so Canadian franchisors often tried to lease the desired property and then sublet it to franchisees. It remains to be seen how the situation in the real estate market changes as a result of the economic slowdown caused by the pandemic, particularly in the office and retail sectors affected by the shift to remote working and e-commerce.

Currently, the Canadian dollar is weak compared to some major currencies, such as the US dollar. As of end of September 2022, C$1 equalled around US$0.73. Foreign franchisors may want to consider introducing protections against currency fluctuations and warn potential franchisees of currency fluctuation risks.

4 Definitions and scope of application

4.1 How is 'franchising' defined in your jurisdiction?

The definition provided in the provincial Franchise Acts includes both business format franchises and a variation of product distribution arrangements.

The Franchise Acts define a 'franchise' as a right to engage in a business in which a franchisee is required to make a direct or indirect payment (or continuing payments) to a franchisor in the course of operating the business or as a condition of acquiring the franchise or commencing operations, and in which either:

• the franchisor grants the franchisee the right to sell goods or services associated with the franchisor's trademark, trade name or commercial symbol, and the franchisor exercises significant control over or offers significant assistance for the franchisee's method of operation (including building design and furnishings, locations, business organisation, marketing techniques or training); or
• the franchisor grants the franchisee the representational or distribution rights to sell goods or services supplied by the franchisor or a designated supplier, whether or not associated with the franchisor's trademark, trade name or another commercial symbol, and the franchisor or its designated person provides location assistance, including retail outlets or accounts, securing locations or sites for vending machines, display racks or other product sales displays used by the franchisee is involved.

4.2 What are the key requirements that apply to franchising?

The Franchise Acts contain requirements on:

• pre-sale disclosure obligations and exemptions;
• the duty of fair dealing;
• the franchisees' right to associate;
• statutory right of damages;
• rescission rights; and
• the jurisdiction of provincial laws and courts.

In the disclosure provinces, pre-sale disclosure is mandatory unless a disclosure exemption applies. There is no franchise-specific law in Quebec; however, the Civil Code of Quebec imposes a duty of good faith on contracting parties. Courts have established that the duty of good faith under the code requires the franchisor to inform a prospective franchisee of any relevant information that might have a decisive impact on the prospective franchisee's decision to buy the franchise.

It is not mandatory to provide disclosure in non-disclosure provinces; however, many franchisors choose to provide a disclosure document on an information-only basis.

There is no requirement to register a disclosure document or franchise agreement with any government body in Canada.

Except for the requirement to arbitrate or litigate certain disputes in the franchisee's province, the Franchise Acts impose no mandatory terms on the parties.

4.3 Is registration of the franchise agreement, a trademark licence or other documentation required?

No registration of the franchise agreement or a trademark licence agreement is required in Canada.

4.4 Are mandatory contract terms imposed?

No, there is no mandatory contract terms imposed in franchise agreement or a trademark licence agreement.

4.5 What specific activities (if any) are prohibited under the franchising laws and regulations? What are the potential consequences of breach?

The Franchise Acts do not prohibit any particular activities. However, when conducting business, franchisors should keep in mind their duty to act in good faith towards the franchisees.

5 Initial steps

5.1 Are there any restrictions on foreign franchisors entering your jurisdiction?

No. If a foreign franchisor enters the Canadian market by setting up a subsidiary company in Canada or obtaining control of a Canadian business, such conduct is considered as investment and subject to review under the Investment Canada Act. The federal government has a right to block a foreign investment if the enterprise value or the book value of the Canadian business exceeds prescribed monetary thresholds, or if there are national security concerns; however, investments on this scale are not common in the franchise industry.

5.2 Are franchisors required to establish a local presence? If so, what is the most common corporate structure adopted by foreign franchisors entering your jurisdiction?

Currently, the general view is that franchisors are not required to establish a local presence in Canada to be able to sell franchises. However, this is true to specific circumstances and may be challenged.

Foreign franchisors can choose between:

• franchising directly in Canada (ie, without opening a Canadian subsidiary or a branch); or
• establishing a local presence by incorporating a subsidiary or opening a branch.

The choice of a structure will depend on:

• the franchisor's tax goals;
• the need for a local presence in Canada; and
• the franchise model (direct unit, master franchising or a variation of the development models).

For an international franchisor expanding into Canada via unit franchising, master franchising or area development or the area representation model without putting 'boots on the ground', establishing a local presence is generally not required. The franchisor can contract with franchisees without establishing a branch or a subsidiary in Canada.

If the franchisor chooses to have a presence in Canada to better support its franchisees, particularly using the direct unit model, the franchisor may choose between operating as a branch or establishing a subsidiary in Canada. Franchisors usually prefer to establish a subsidiary rather than opening a branch, as incorporating a subsidiary in Canada limits a foreign parent's exposure to liability for debts and liabilities incurred by Canadian operations.

5.3 What requirements or restrictions apply with regard to the selection and recruitment of franchisees?

The Franchise Acts impose no restrictions on the selection and recruitment process. However, recruitment and selection must comply with privacy laws and human rights codes.

5.4 Are franchisees subject to any legal obligations when purchasing a franchise?

No, franchisees have no legal obligations when purchasing a franchise. In Quebec and elsewhere, a franchisee must act in good faith.

6 Disclosure and due diligence

6.1 What pre-contractual disclosure requirements apply to franchisors in your jurisdiction?

In the disclosure provinces, a franchisor must provide a disclosure document to a prospective franchisee at least 14 days prior to entering into a franchise agreement or payment of a franchise fee. Disclosure documents must include all material facts that a prospective franchisee needs to know to make an informed decision to buy a franchise, including information prescribed by the franchise regulations. Franchise regulations require disclosure of certain information about:

• the franchisor and the system;
• litigation and administrative orders;
• territorial rights;
• fees; and
• an estimate of the initial investment.

In addition to the information prescribed by the regulations, a 'material fact' is any information about the franchise system or the business, operations, capital or control of the franchisor that would reasonably be expected to have a significant effect on the value or price of the grant or on the decision to acquire the franchise.

Information disclosed must be complete and accurate as of the date of the disclosure document (except for certain information, such as financial statements, which must be current as of the end of the previous fiscal year).

In Quebec, the disclosure obligation stems from the general principle of the duty to negotiate in good faith, imposed on contracting parties by the Civil Code of Quebec. There are no specific requirements for disclosure enumerated in the code. Courts have established that the duty of good faith under the code requires a franchisor to inform the franchisee of any relevant information that might have a decisive impact on the prospective franchisee's decision to buy the franchise.

6.2 What formal, substantive and procedural requirements apply with regard to the disclosure document in your jurisdiction?

There is no specific format that a disclosure document must follow. However, several requirements must be satisfied, such as:

• the inclusion of certain statements at the beginning of the document; and
• the signature of a certificate attesting to the accuracy and completeness of the information.

Ontario, New Brunswick and Prince Edward Island require that disclosure be provided in one document at one time.

Of particular importance is the requirement to include a certificate, dated and signed by at least two directors or officers of the franchisor (or one director/officer if the franchisor has only one director and officer), attesting to the accuracy of the information contained in the disclosure document and that no material facts were omitted. An undated and unsigned disclosure or absence of the certificate is a fatal flaw that gives the franchisee the right to rescind the franchise agreement within two years of signing and demand significant compensation, including the return of all fees paid to the franchisor.

If the information provided in the disclosure document changes significantly between the date of disclosure and the date of signing of the franchise agreement, the franchisor must provide a statement to that effect to the franchisee.

Disclosure may be delivered to the franchisee physically (personally, by courier or registered mail) or electronically if receipt is acknowledged in writing.

Certain exemptions from the disclosure requirements are available under the Franchise Acts.

6.3 What pre-contractual disclosure requirements apply to franchisees in your jurisdiction?

There are no pre-contractual disclosure requirements that apply to franchisees.

6.4 What are the consequences of any breach of the pre-contractual disclosure requirements?

Failure to provide disclosure, or incomplete or inaccurate disclosure, gives the franchisee the right to rescind the franchise agreement, demand the return of its investment and claim damages. The rescission period for incomplete disclosure is 60 days; if no disclosure was provided, the franchisee can rescind the franchise agreement within two years of the date of signing of the franchise agreement.

The two-year rescission remedy is also available where disclosure was provided but lacked certain significant material facts, such as the franchisor's financial statements. The Canadian courts have held that failure to disclose certain material facts may result in the disclosure document being so deficient as to amount to no disclosure at all, resulting in a two-year rescission remedy. Franchisors should pay attention to the disclosure of all material facts in addition to the prescribed list of information.

In Quebec, the failure to provide information to a prospect may result in the reduction of certain obligations, rescission of the franchise agreement and a damages award.

6.5 What other due diligence should the parties undertake before entering into a franchise agreement?

There are no other due diligence procedures mandated by the Franchise Acts. However, general business due diligence is prudent.

6.6 Are there any restrictions imposed upon franchise brokers in your jurisdiction?

No. However, a franchisor's broker may be liable for damages to the franchisee for losses arising from:

• a misrepresentation contained in the disclosure document or statement of material change; or
• the franchisor's failure to comply with Section 5 disclosure obligations under the Arthur Wishart Act.

A franchisor's broker may rely on a due diligence defence.

Franchise brokers must be careful to ensure that they do not inadvertently publish advertisements or listings or engage in any activity that courts may construe to constitute trade in 'real estate' or 'securities'. In Ontario, franchise brokers cannot provide insurance-related advice or services (prohibited by the Registered Insurance Brokers Act, RSO 1990).

6.7 Are franchisors permitted to provide pre-sale information on operational performance (eg, financial performance representations or earnings claims), or are such statements regulated or banned?

As mentioned in question 6.1, franchisors must disclose 'all material facts' that can impact on the decision to buy a franchise. In this sense, franchisors must assess whether the information on operational performance is 'material' and thus falls into the 'must-disclose' category.

If franchisors have the option and choose to include an estimate of annual operating costs and earnings projection in the disclosure document, this information must be provided, accompanied by:

• a statement specifying:
• • the basis for the estimate;
  • the assumptions underlying the estimate; and
  • the location where information is available for inspection that substantiates the estimate; or
• a statement specifying:
• • the reasonable basis for the projection;
  • the assumptions underlying the projection; and
  • the location where information is available for inspection that substantiates the projection.

Other than a section of financial performance representations, franchisors must provide an audited financial statement or review engagement reports for the most recently completed fiscal year of the franchisor's operations, prepared in accordance with the standards set out by the applicable franchise laws.

7 Franchise agreement

7.1 What formal, substantive and procedural requirements apply with regard to the franchise agreement in your jurisdiction? Are there any mandatory terms? What terms are typically included in the agreement?

In the disclosure provinces, a franchise agreement must be signed after at least 14 days have passed since the date of disclosure. No mandatory terms are prescribed by the Franchise Acts.

Typically, a franchise agreement includes terms relating to:

• payment of royalties and other fees;
• territorial grant;
• reservation of rights;
• terms and conditions for renewal;
• restrictive covenants;
• location control;
• training;
• operating assistance and support;
• advertising obligations;
• inspections and audit;
• IP protection;
• confidentiality;
• termination and post-termination obligations;
• transfer and assignment;
• security interests and guarantees; and
• dispute resolution.

7.2 Do any specific requirements apply regarding the governing law or jurisdiction of the franchise agreement?

The Franchise Acts of the disclosure provinces do not allow the parties to restrict the application of the respective Franchise Acts or the jurisdiction of courts of the respective province by agreement. Therefore, even if the franchise agreement is governed by the laws of another jurisdiction, claims enforceable under the Franchise Act must be heard in the respective disclosure province.

In British Columbia, all claims arising under the franchise agreement must be heard in British Columbia. In Ontario, Alberta, Manitoba, New Brunswick and Prince Edward Island, parties may agree to govern non-statutory claims by the law of another jurisdiction (usually, the franchisor's home jurisdiction).

7.3 Does the franchisor have any mandatory rights and obligations under the franchise agreement?

There are no specific rights or obligations prescribed by the Franchise Acts. However, the franchisor must:

• perform the franchise agreement and exercise its rights in good faith; and
• permit associations of franchisees.

The content of the duty of good faith is highly fact specific; and while it cannot be used to rewrite the terms of the contract, the exercise of the franchisor's rights under the franchise agreement will be subjected to the good-faith requirement. For example, even where the agreement gives the franchisor the right to do something 'in its sole discretion', the franchisor may not exercise its discretion arbitrarily or capriciously, or knowingly mislead the franchisee. Therefore, the franchise agreement must be drafted expressly and unambiguously to avoid unintentional restriction of the franchisor's rights.

7.4 Does the franchisee have any mandatory rights and obligations under the franchise agreement

The Franchise Acts give the franchisees the right to associate and to form an organisation of franchisees. This right includes the right to join a class action lawsuit.

There are no obligations imposed on the franchisee by the Franchise Acts, except for the duty to perform the contract in good faith.

7.5 What restrictions can the franchisor impose on the franchisee's activities under the terms of the franchise agreement (eg, purchasing requirements, non-compete obligations, exclusivity, price control)?

Franchisors can, acting reasonably, impose certain restrictions on the franchisees' activities commonly seen in franchising, including purchasing requirements, exclusivity, non-compete and non-solicitation restrictions.

Both in-term and post-term non-compete restrictions are common in Canadian franchise agreements. However, to be enforceable, a non-compete covenant must not be overbroad. The Canadian courts have held that non-compete restrictions must be reasonable and specific in terms of geographic boundaries, duration and scope of restrictive activities, and should not constitute an undue restriction on trade or on a person's ability to earn a living. If a court finds the non-compete clause too broad, it will not rewrite the clause to make it enforceable and will strike down the whole provision. Franchisors should carefully draft their non-compete clauses, including, where necessary, limiting the geographic boundaries, the scope of restrictive activities or the duration. In a 2009 decision, Supreme Court of Canada also refused to uphold a non-compete clause because of the ambiguity of the restricted activities.

In Ontario, an amendment to the Employment Standard Act that retrospectively came into effect in December 2021 banned non-compete agreement in the employment context with a few exceptions. This means that a non-compete provision that a franchisor imposes on a franchisee in Ontario may be void and invalid.

Non-solicitation clauses are viewed as a lesser restraint on a person's ability to make a living and may be easier to enforce than a non-compete clause.

Vertical price restraints, such as minimum selling prices, may be contrary to the Competition Act if this conduct has had or is likely to have an adverse effect on competition in the applicable industry. This usually happens when the supplier has a significant market power (at least 35% market share), which is not commonly seen in franchising. If the Competition Bureau finds that a franchisor has engaged in price maintenance that has resulted in an adverse effect on competition, it may be ordered to stop the offending activities. There are no penalties prescribed for such conduct. Further to an amendment to the Competition Act that came into force on 23 June 2022, franchisors cannot require franchisees to sign wage-fixing or no-poaching agreements.

7.6 Is there a duty of good faith imposed upon the franchisor and franchisee?

The Civil Code of Quebec imposes a general duty of good faith on contracting parties both before and after contract formation. The code states that "no right may be exercised with the intent of injuring another or in an excessive and unreasonable manner and therefore contrary to the requirements of good faith".

The Franchise Acts also impose a statutory duty of fair dealing on both the franchisee and franchisor in the performance and enforcement of the franchise agreement. The obligations imposed on a franchisor by the duty of good faith and fair dealing are highly fact specific; but generally, this duty requires the franchisor to consider the legitimate interests of its franchisees in exercising its contractual rights (eg, when implementing system changes) so as not to "destroy the rights of the franchisees to enjoy the fruits of the contract".

Failure to act in good faith will give rise to a right to claim damages against the breaching party.

The Supreme Court of Canada has recognised that a duty of good faith in the performance of a contract is a general, organising principle of common law and applies to all commercial contracts in Canadian common law provinces.

7.7 What are the parties' rights and obligations in relation to renewal of the franchise agreement, and what is the process for renewal?

The right of renewal and conditions on which the renewal can be granted are governed by the franchise agreement. It is common to impose certain conditions on the franchisee's right to renew, such as:

• continuous compliance with the franchise agreement;
• achievement of certain minimum requirements or market penetration; and
• payment of the renewal fee.

The duty to act in good faith applies to the renewal of the franchise agreement in the sense that the franchisor cannot act dishonestly to prevent the franchisee from renewing the agreement if the franchisee meets the conditions for renewal. However, where the franchise agreement does not give the franchisee the right to renew, the duty of good faith cannot be used to impose the obligation to renew on the franchisor.

7.8 What formal, substantive and procedural requirements apply with regard to termination of the franchise agreement in your jurisdiction?

In the absence of statutory termination provisions in the Franchise Acts, the duty of good faith and the language of the franchise agreement inform the requirements that the franchisor must meet when terminating a franchisee.

It is generally considered unfair to terminate a franchisee for minor infractions or without giving the franchisee an opportunity to cure defaults that are capable of being cured (eg, payment delays). Immediate termination without advance notice should be reserved only for the most serious defaults, such as fraud, abandonment of the franchise business or bankruptcy.

As a practical matter, franchisors should document franchisees' defaults and send advance notice of default to franchisees. Where applicable, franchisees should be given reasonable time to cure the default. Consistent communication and fair treatment of franchisees can help the franchisor to avoid claims of unfair termination.

7.9 Are there any restrictions on repatriating funds out of your jurisdictions?

There are no such restrictions, unless the franchisor is subject to economic or trade sanctions imposed by the government of Canada.

The tax liability associated with the repatriation of profits will depend on the franchisor's corporate structure and the existence of a permanent establishment in Canada.

7.10 Are there any withholding taxes that apply to franchising in your jurisdiction (not including the effect of double taxation treaties)?

Several types of withholding taxes can apply to franchising activities.

If the franchisor operates in Canada without establishing a permanent presence in the country, the franchisor's income from initial fees, royalties, management fees and interest payments from Canadian franchisees will be subject to a 25% withholding tax. The tax rate is reduced under some tax treaties. For example, residents of the United States, Australia and the United Kingdom are subject to just 10% withholding tax.

Fees paid to a non-resident franchisor for administrative support may be subject to a separate 25% withholding tax under domestic Canadian law. However, the franchisor may be exempt if there is a tax treaty with the franchisor's home jurisdiction and the franchisor does not have a permanent establishment in Canada.

Service fees for services rendered in Canada are subject to a 15% withholding tax and an additional 9% if the services are rendered in Quebec. In certain circumstances, a waiver from the Canada Revenue Agency may be obtained in respect of the service fee withholding tax. Some service payments may be considered royalties and be taxed accordingly if the payment is made for the use of trademarks or other IP rights.

The obligation to pay withholding tax lies with the franchisee, who must deduct the amount of the tax from each payment made to the non-resident franchisor. The franchisor can offload the withholding tax liability on franchisees by requiring them to gross-up all payments by the amount of the tax.

8 Operational standards

8.1 What legal status does the operations manual have in your jurisdiction?

The Franchise Acts do not specifically govern operations manuals, except by requiring disclosure of the table of contents. In order to oblige the franchisee to follow the manual, the franchise agreement must contain the respective covenant.

Under the Civil Code of Quebec, the franchisee will not be bound by an external document (eg, an operations manual) if that document was not brought to the attention of the franchisee before signing. It is therefore very important to give the franchisee a copy of the manual during the disclosure stage, but before signing the agreement.

8.2 How can the franchisor ensure compliance with its operational standards during the term of the franchise agreement?

In addition to a franchisee's contractual undertaking to comply with the franchisor's standards and the franchise agreement clause incorporating the manuals, it is important to have a process or system in place to monitor the franchisee's performance on a regular basis. A combination of digital tools (eg, point-of-sale systems, inventory management software) and offline tools (eg, field representatives visits, inspections and audits) may be used. Franchisors should provide regular written feedback to the franchisees.

8.3 Can the franchisor make unilateral changes to its operational standards during the term of the franchise agreement?

Yes, the franchisor can make unilateral changes to its operational standards if it has the right to do so under the franchise agreement and the changes are made in good faith, taking into account the interests of the franchisees and the system as a whole.

In New Brunswick, if the franchisor has the right to unilaterally amend any terms or conditions of the franchise agreement, it must include a statement to that effect in the disclosure document.

9 Intellectual property

9.1 How are brands protected in your jurisdiction and what specific implications does this have in the franchising context?

Canada is a first-to-use as opposed to first-to-file jurisdiction: trademark rights can be acquired through use, as well as through registration. Therefore, before launching a new brand in Canada, the franchisor should conduct a comprehensive search to identify any prior users or potentially confusing brands.

Even though common law rights in unregistered trademarks can be enforced in Canada, registration of a trademark significantly strengthens the level of protection and the value of the mark. Registration provides nationwide protection, regardless of whether the mark is actually used in all parts of Canada. Franchisors should apply to register their marks sooner rather than later, as the registration process is very protracted and may take at least 28 months or longer, even for straightforward applications.

An amendment to the Charter of the French Language adopted in 2022 affects trademark rights in Quebec. If a trademark is not yet registered in Canada, it must be accompanied by its French equivalent on public signs and in commercial advertising and the French equivalent must be markedly predominant. Trademarks registered in English only, to be included on public signage that is visible from the exterior, must be accompanied by a French generic term or slogan, which must be markedly predominant.

Canada is a party to the Madrid Protocol, which allows trademark owners to file a single application for international registration with the World Intellectual Property Organization.

Given that Canada has two official languages, French and English, an English language trademark may be confused with a trademark in French and vice versa. A trademark that is likely to be confused with another trademark in English or French will not be registered by the Canadian Intellectual Property Office. As such, franchisors should research whether there are confusing brands operating under a French-language trademark even if there are no immediate plans to expand to French-speaking areas, mainly Quebec.

9.2 How are other intellectual assets of the franchisor (eg, know-how, trade secrets) protected in your jurisdiction and what specific implications does this have in the franchising context?

The franchisor's copyright, inventions and designs are protected by the Copyright Act, the Patent Act and the Industrial Design Act, respectively.

There is no federal legislation protecting know-how, trade secrets or confidential information. These assets should be protected by a contract between the parties.

In all disclosure provinces except Ontario, the franchisor may ask the franchisee to sign a non-disclosure agreement prior to providing disclosure to the franchisee. The franchisee's employees will not be bound by the franchisee's confidentiality obligations set out in the franchise agreement, so the franchise agreement should impose an obligation on the franchisee to obtain signed confidentiality undertakings from its employees and restrict access to sensitive information.

10 Employment

10.1 What is the applicable employment regime in your jurisdiction and what specific implications does this have in the franchising context?

Employment is generally regulated on a provincial level, except with respect to certain businesses that are governed exclusively by federal law (eg, banks and telecommunications operators) or across provincial or national borders (eg, inter-provincial transportation). Provincial laws govern employment standards, labour relations (including labour unions), workers' compensation, occupational safety and human rights.

The Canadian courts have recognised that franchisees are generally independent businesses even though franchise agreements entail some degree of control by the franchisor. However, franchisors should be careful not to exercise substantial control and management over the day-to-day operations of the franchisee's business, especially when it relates to the employees of the franchisee. Such conduct may cause Canadian courts to declare a franchisor as a 'common' or 'joint' employer with the franchisee in claims brought by employees, giving rise to liability for employees' claims for wrongful dismissal, wage and overtime payments, collective agreements claims and even human rights complaints.

10.2 Can franchisees be deemed to be employees of their franchisor?

In a typical franchise relationship, franchisees generally will not be considered employees of the franchisor. However, in certain circumstances, if the franchisor's operational control ties the franchisees' business to the extent that they become economically dependent on the franchisor, franchisees can be deemed employees of the franchisor for labour relations purposes. Such operational control may be manifested in setting prices for goods and services or restricting the franchisee's ability to market to new customers.

Janitorial service systems can be particularly vulnerable to this risk where the franchisor contracts with and collects payments directly from customers, remitting money to the franchisees after deducting franchisor's fees. If the franchisee effectively functions as a manager rather than an owner, he or she can be deemed an employee of the franchisor.

11 Competition

11.1 What is the applicable competition regime in your jurisdiction and what specific implications does this have in the franchising context?

Competition law is in the federal domain. The Competition Act regulates restraints on trade such as price fixing, exclusive dealing and refusal to deal. Serious anti-competitive activities, such as price fixing between competitors and bid rigging, are criminal offences. Vertical market constraints which are common in franchising – such as territorial restrictions, resale price maintenance and exclusive dealing – are reviewable by the Competition Bureau if they negatively affect competition, which is rare in the franchise industry, as a negative effect on competition would require a significant market share.

12 E-commerce

12.1 How is e-commerce regulated in your jurisdiction and what specific implications does this have in the franchising context? Can franchisees be prohibited from using e-commerce in their businesses?

E-commerce is regulated provincially. Every province in Canada has adopted electronic commerce legislation that regulates transactions that occur in electronic form. Provided that certain requirements are met, online transactions and contracts concluded electronically are enforceable.

Franchisors may require the franchisees to use e-commerce in accordance with the terms of their agreement, including using the franchisor-controlled website and an e-commerce system centrally set up by the franchisor. Some systems choose to restrict franchisees from using e-commerce in their franchise business – the Franchise Acts impose no restrictions on the franchisor's right to prohibit the franchisees from using e-commerce, subject to the duty of good faith. However, as many businesses were forced to close their physical locations due to the restrictions imposed by the governments to limit the spread of COVID-19, franchise systems that did not have a system-wide e-commerce programme in place had to loosen restrictions on their franchisees to sell products or offer services online.

Non-residents generally cannot register a '.ca' domain name unless it represents or includes an exact word component of their registered Canadian trademark. Therefore, if a non-resident franchisor plans to launch an e-commerce platform on a '.ca' domain name, it should apply to register the Canadian trademark well in advance, due to the long processing times at the Canadian Intellectual Property Office.

13 Consumer protection

13.1 What consumer protection measures are applicable in your jurisdiction and what specific implications do these have in the franchising context?

Merchants, suppliers and manufacturers must comply with Canadian provincial consumer protection statutes that govern warranties of quality on goods and services, unfair business practices such as misrepresentation and remedies available to consumers. In Quebec, consumer protection issues are governed by the provincial Consumer Protection Act and the Civil Code of Quebec. In addition, the federal Competition Act prohibits businesses from making public representations that are materially false or misleading, such as 'drip-pricing' (ie, presenting a price to a customer that in fact is unachievable because of mandatory fixed additional charges or fees revealed at later stages of the purchasing process).

The federal Consumer Product Safety Act and other industry-specific statutes set out the standards that consumer products must meet.

Franchisors from outside Canada may need to adapt their operations manuals and/or products or services to comply with Canadian consumer protection statutes. Franchisors should not offload the responsibility to adapt products or services to their franchisees, in order to maintain uniform standards of quality throughout the system.

13.2 Are franchisees covered under any of these consumer protection measures?

Franchisees are not treated as consumers by the laws of Canadian common law provinces. To our knowledge, Quebec courts have not yet extended the provisions of the Consumer Protection Act to franchisees; however, certain consumer protection provisions of the Civil Code of Quebec, such as rules applicable to contracts of adhesion, apply to the franchise agreements between franchisors and franchisees.

14 Data security and cybersecurity

14.1 What is the applicable data protection regime in your jurisdiction and what specific implications does this have in the franchising context?

Canadian privacy standards are similar to those adopted in the European Union.

Privacy matters in Canada are regulated at the federal and provincial levels. Federally, the Personal Information Protection and Electronic Documents Act (PIPEDA) applies to federally regulated businesses as well as interprovincial and international matters. At the provincial level, currently, only Alberta, British Columbia and Quebec have adopted their own privacy legislation. In the rest of the provinces, PIPEDA applies to commercial activities within a province. Some provinces also have specific privacy laws for the health sector.

PIPEDA sets out the ground rules for how private-sector organisations collect, use and disclose personal information in the course of commercial activities across Canada. The European Commission has previously determined that Canada meets the 'adequate level of protection' standard for cross-border transfer of personal data between Canada and the European Union.

Generally, non-governmental organisations in Canada are not required to store personal information within the country. Franchisees may transfer personal information abroad to the franchisor for data management or processing purposes if the franchisee retains control of personal data. In Alberta, the transfer of personal information abroad for processing requires prior notification to the individual. In addition, the federal Office of the Privacy Commissioner recommends that all organisations advise their customers if their personal information will be processed in another jurisdiction.

14.2 What cybersecurity obligations are applicable in your jurisdiction and what specific implications does this have in the franchising context?

Canada has a very strict anti-spam law (CASL) which prohibits sending 'commercial electronic messages' (CEMs) (including emails, SMS text messages, instant messages and messages sent through social networks) without consent. Any message that encourages participation in a commercial activity is considered 'commercial'. This includes advertisements and information about promotions, offers, business opportunities, events and so on. Notably, an electronic message that is sent to obtain consent to send a message for commercial purposes is also considered a CEM.

CASL also prohibits installation of a computer program on another's computer system in the course of a commercial activity without consent, and prohibits the alteration of the transmission data in an electronic message so that the message is delivered somewhere other than, or in addition to, the destination specified by the sender. CASL also prohibits address the harvesting and sending of commercial electronic messages without the recipient's consent.

The sanctions for non-compliance are quite significant, including:

• a charge of criminal offence for obstructing an investigation;
• administrative penalties of up to C$10 million; and
• personal liability for an organisation's officers and directors.

Hacking, direct denial of service attacks, phishing and identity theft can also be criminally prosecuted.

If the franchisees collect sensitive customer data as part of their systems, such as credit card or personal information, franchisors should consider requiring franchisees to implement stringent security measures and obtain cyber insurance.

15 Disputes

15.1 In which forums are franchising disputes typically heard in your jurisdiction (ie, courts or arbitration)?

Both mediation and arbitration are recognised in Canada and can be used in franchise disputes. However, the benefits of arbitration over litigation (speed and confidentiality) are somewhat nullified by the higher costs and the requirement to disclose 'all material facts', which means that some details of an arbitral award may need to be disclosed in the franchisor's disclosure document notwithstanding the confidentiality of the proceedings.

Directly going to the court is common too, depending on:

• the nature of the dispute; and
• whether the parties have an enforceable arbitration clause in the franchise agreement.

Franchise disputes in Canada fall under the jurisdiction of provincial courts, unless the dispute involves purely a matter of federal jurisdiction (eg, a trademark). In the disclosure provinces, the parties cannot restrict the application of the respective Franchise Acts or jurisdiction of provincial courts by agreement.

Jury trials are not used in franchise disputes.

Statutory rescission claims are often brought by franchisees in the disclosure provinces for failure to provide a disclosure document or provision of a deficient disclosure document. Other common franchise disputes include:

• termination;
• non-renewal;
• enforcement of non-compete clauses;
• claims for damages resulting from breach of a franchise agreement; and
• disputes about whether a contract was a franchise.

Damages awards in Canadian courts are generally less generous than in the United States. In a contractual dispute, damages will generally be awarded to place the non-breaching party in the position he or she would have been in had the contract been performed. Punitive damages awards are rare.

The winning party may be awarded part of its legal costs.

Franchise disputes may be heard in a foreign jurisdiction if:

• the franchise is located in a non-disclosure province; or
• the franchise is located in a disclosure province, but the issue in dispute is not governed by the Franchise Act.

Generally, Canadian courts will extend comity and recognise a final foreign judgment rendered by a foreign court that had jurisdiction over the dispute – that is, if it had a 'real and substantial connection' to the dispute.

15.2 Is mandatory non-binding mediation commonly used in franchising in your jurisdiction?

Mediation is often used as a pre-litigation or pre-arbitration dispute resolution mechanism. Several provinces require some form of pre-trial mediation in civil litigation. In New Brunswick, mediation is mandatory if one of the parties to the franchise agreement requests it.

15.3 Is arbitration in your jurisdiction subject to any special requirements? Is your jurisdiction a party to the New York Convention?

Canada is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Foreign and domestic arbitral awards will be recognised and enforced upon an application to the relevant provincial court. Courts afford deference to arbitrators' decisions and apply the standard of reasonableness rather than a stricter standard of correctness when reviewing arbitral awards, except for matters of a 'pure question of law'.

15.4 Can class actions be brought in your jurisdiction? If so, what specific implications does this have in the franchising context?

Class actions can be brought in Canadian courts. In the disclosure provinces, the Franchise Acts give the franchisees the statutory right to associate, which was interpreted by the Canadian courts as the right to bring a class action against the franchisor. Arguably, the statutory right to associate makes a waiver of class actions unenforceable in the disclosure provinces, but the courts have not yet ruled on this issue.

15.5 Have there been any recent cases of note?

One of the most hotly debated issues in Canadian franchise law and practice is the disclosure of head leases, where the franchisor leases the premises of a franchise location itself and then subleases the premises to the franchisee. The disclosure of head leases is not required under any provincial franchise regulations, but the courts have recognised that a head lease for a franchise location is a material fact that must be disclosed to the franchisee. In Raibex Canada Ltd v ASWR Franchising Corp, 2018 ONCA 62, the Ontario Court of Appeal ruled that the non-disclosure of a head lease is not a fatal flaw if:

• the head lease does not exist at the time of disclosure; and
• the franchise agreement allows the franchisee to terminate the agreement if the terms of the head lease end up being unacceptable to it.

In Uber Technologies Inc v Heller, 2020 SCC 16, the Supreme Court held that an arbitration clause may be unconscionable if the arbitration is too costly and inaccessible for a party to the agreement.

In its 2021 decision in Kang v Advanced Fresh Concepts Franchise Corp, 2021 BCPC 262, the Provincial Court of British Columbia (as small claims court) granted a stay of proceedings brought by a franchisee in the small claims court, relying on the arbitration provision in the franchise agreement between the franchisee and franchisor. Foreign franchisors that prefer to arbitrate with their franchisees outside of Canada should carefully consider the implications of this decision for their franchise agreements.

In a recent Ontario decision, 2611707 Ontario Inc v Freshly Squeezed Franchise Juice Corporation, 2022 ONCA 437, the court granted a rescission based on a number of material deficiencies, including failure to disclose that the proposed location was the first non-mall location in the system. The court held that this constituted material fact because, in a sense, the franchisor was 'test-driving' this new type of a location in its system, as it could pose a risk to the financial viability of the venture.

16 Trends and predictions

16.1 How would you describe the current franchising landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

Although not every province in Canada has enacted franchise legislation, we do not anticipate any non-disclosure provinces to enact a franchise statute at this time. There is an interest in the franchise industry to revise the Uniform Franchises Act and Regulations, prepared by the Uniform Law Conference of Canada (ULCC), which serves as a model for many provincial Franchise Acts; but the ULCC has not yet committed to the review.

On 1 September 2020, amendments to the Ontario Franchise Act, passed in November 2017, were brought into force. These amendments harmonised the Ontario Franchise Act with the majority of the other provincial franchise acts by permitting charging deposits and entering into confidentiality and site selection agreements before disclosure. We do not anticipate any other major reforms to franchise laws in the near future.

17 Tips and traps

17.1 What are your top tips for franchisors seeking to enter your jurisdiction and what potential sticking points would you highlight?

Although Canada is often seen as a '51st state' and its franchise disclosure rules are based in part on franchise rules developed in the United States by the Federal Trade Commission and the states, Canadian franchise laws differ from those in the United States in one significant respect. In the disclosure provinces, in addition to the prescribed information, franchisors must disclose all material facts that can impact on the decision to buy a franchise. The registration of a franchise disclosure document is not required anywhere in Canada. Accordingly, there is no date of registration for a disclosure document. Unless otherwise specified in the regulations, the items disclosed should be generally accurate as of the date on which the disclosure document is given to the franchisee.

Initially, the requirement to disclose all material facts was overlooked and franchisors limited their disclosure to items prescribed by the regulations. However, the courts tend to give considerable weight to this requirement. As a result, failure to disclose material facts may have grave consequences for a franchisor, including rescission of the franchise agreement, refund of franchise fees and compensation of franchisees' losses or damages. The courts have held that failure to disclose important information such as a head lease (where the franchisor sublets the franchise premises to the franchisee), absence of a signed certificate, failure to include financial statements or provision of outdated statements, as well as piecemeal disclosure (in Ontario), constitutes a fatal flow that can lead to the rescission of the franchise agreement and damages award.

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.