INTRODUCTION
What are the key considerations for manufacturers and distributors of consumer products carrying on business in Canada? What are the potential opportunities, and where are the possible pitfalls?
Cross-Border: A Consumer Products Industry Guide to Doing Business in Canada was developed by McCarthy Tétrault's Retail and Consumer Markets Group as a basic guide to the legal aspects of establishing and operating a consumer products business in Canada.
We have organized this Guide into what we hope you will find to be a useful and userfriendly resource. The Guide proceeds through each of the areas of law most likely to affect your business decisions.
CROSS-BORDER: A CONSUMER PRODUCTS INDUSTRY GUIDE TO DOING BUSINESS IN CANADA WAS DEVELOPED BY MCCARTHY TÉTRAULT'S RETAIL AND CONSUMER MARKETS GROUP AS A BASIC GUIDE TO THE LEGAL ASPECTS OF ESTABLISHING AND OPERATING A CONSUMER PRODUCTS BUSINESS IN CANADA.
The discussion in each chapter is intended to provide general guidance and is not an exhaustive analysis of all provisions of Canadian law with which your business may be required to comply. For this reason, we recommend that you seek the advice of one of our lawyers on the specific legal aspects of your proposed investment or activity. With offices in Canada's major commercial centres, as well as representative offices in New York City and London, U.K., McCarthy Tétrault has substantial presence and capabilities to help you successfully establish and operate a consumer-facing business in Canada
For more information about our Retail and Consumer Markets Group, please see ourProfile.
Unless otherwise indicated, the information in this publication is current as of January 1, 2025.
Canadian Market Entry: Key Considerations
CANADIAN MARKET ENTRY: KEY CONSIDERATIONS
Canada continues to experience a number of new entrants to its consumer products market including direct-to-consumer brands that are expanding their business throughout the country. Whether expanding into or throughout Canada by way of acquisition, distribution or e-commerce (or a combination), consumer products businesses will be faced with a number of business and legal considerations. We have set out below some of the legal considerations that arise most often. Many of these are covered in the specific chapters in this Guide.
Tax and Corporate Structure Considerations
Consider tax and corporate law implications. Tax and corporate considerations include: (i) determining whether to operate as a branch or a subsidiary, (ii) the type of entity and jurisdiction (in the event of a subsidiary or new Canadian entity), (iii) ensuring the application of and compliance with Canadian registration requirements such as extraprovincial registrations, business number registration, goods and services tax, harmonized sales tax and provincial sales tax registrations, worker's compensation registrations and, in certain provinces, employer health tax registration, (iv) abiding by applicable transfer pricing and customs valuation requirements and (v) developing efficient inter-corporate structures for sales, provision of services and licensing of intellectual property. Some Canadian jurisdictions have corporate director residency requirements. Any tax considerations should also consider the Income Tax Act's General Anti-Avoidance Rule ("GAAR"), which prevents abusive tax avoidance transactions.
Customs and Trade
Consider administrative and regulatory issues in your supply chain design. A variety of government agencies regulate and/or enforce laws impacting the importation of goods — from product specifications to the application of customs duties and other border charges. Certain categories of goods such as apparel and accessories have relatively high duty rates, which should be considered in strategy and projections.
Labour and Employment
Ensure your employment policies and agreements comply with Canadian legislation. Employment laws in Canada can differ quite significantly from those in other jurisdictions. It is essential that employment policies, agreements and handbooks comply with applicable provincial and federal legislation. In Canada, while certain employers are regulated federally, the vast majority of the workforce is regulated by provincial governments. Each province regulates labour and employment matters in a similar though not identical manner. If your business has multiple locations in Canada, employment policies and agreements must comply with those jurisdictions' laws.
There is no "at will" employment in Canada. Unlike the United States and other countries, unless the employment agreement specifies a particular termination package or there is a legal justification for a termination, an employer must provide reasonable notice of termination or pay in lieu of notice.
E-commerce and Digital
Canadianize your terms and conditions. Issues relevant to establishing a Canadian e-commerce website include compliance with Canadian provincial e-commerce and consumer protection legislation, security, domain name acquisition and meeting "Canadian presence requirements", meeting foreign ownership restrictions on the sale of "cultural products", meeting French language requirements applicable for selling into or in Québec and legal issues relating to privacy, accessibility, marketing, advertising, contests and promotional programs (including with respect to arrangements with influencers).
Pricing, Marketing and Advertising
Develop a robust compliance program regarding advertising and pricing strategy. Canadian advertising law regulates various aspects of the advertising and pricing of consumer goods, including the advertising of sale and bargain prices and claims of what constitutes "ordinary" prices. Canadian competition laws also apply to issues of price fixing and price maintenance, including Minimum Advertised Price policies. Consumers must understand these parameters when establishing their marketing and pricing strategies. Advertising and promotions law in Canada is regulated both federally by the Competition Act and by provincial consumer protection legislation. Contests and sweepstakes are governed federally by a combination of the Criminal Code and the Competition Act. In addition, there are special issues involving contests and advertising directed to minors that require careful treatment.
Labelling, marketing and advertising have different language requirements in Québec. In the province of Québec, generally all language appearing on labels must be in French, and no other language may appear with greater prominence. This can also extend to public advertising, product documentation and websites.
Consumer Protection
Get up to speed on Canadian consumer protection legislation. If your business includes direct sales to consumers, the various consumer protection regimes in Canada come into play, including applicable federal and provincial laws and legislation across Canada related to consumer protection. As with employment laws, consumer protection legislation varies from province to province and consideration should be given to ensuring a consistent yet tailored approach across Canada.
Intellectual Property
Your business can benefit from intellectual property ("IP") protection in Canada. There are four main forms of intellectual property protection in Canada, which are trademarks, patents, industrial design and copyright. Most acts regulating IP are federal legislation with the Canadian Intellectual Property Office ensuring compliance. Canada is also part of various international treaties on IP, such as the World Trade Organization agreement on Trade-Related Aspects of Intellectual Property Rights, which makes Canada robust for IP protection. Finally, provincial laws also play a role in IP protection, mostly in enforcing IP rights and in regulating other spheres of IP, such as IP contracts, business names and personality rights.
Privacy and Cybersecurity
Develop a Canadian-specific privacy and cybersecurity compliance plan (or tailor your existing plan to your Canadian operations). Canada has privacy legislation that applies to consumers from coast to coast, including unique laws in certain provinces. Your plan should start with a clear picture of how you handle personal information, alignment of your consent processes to Canadian law and a customer-facing privacy policy. You should also update your incident response plan, as Canada has mandatory breach notification for data breaches. Also, it is important not to make the mistake of thinking the European Union's General Data Protection Regulation ("GDPR") compliance means compliance in Canada.
Anti-Spam Legislation
Canadian anti-spam legislation applies to you even before you enter Canada, as the laws apply even to organizations outside of Canada to messages that are received in Canada. Further, Canada's anti-spam legislation applies to all commercial electronic messages (and not only messages that are commonly thought of as spam) and is one of the toughest in the world. As such, a carefully designed compliance program is required. Penalties can be as high as C$10 million, and the regulator does enforce the law against legitimate businesses for their email and text messaging practices.
Modern Slavery Legislation
Canada's Fighting Against Forced Labour and Child Labour in Supply Chains Act (the "Act") may impose new reporting obligations on your business. The Act came into force January 1, 2024 and takes on Canada's international commitment to contribute to the fight against forced labour and child labour. Businesses that qualify as "reporting entities" under the Act are required to meet their reporting obligations by May 31 of each year. Canada's government published guidance on the Act's requirement, which includes a guideline on who is a "reporting entity." Among others, reporting entities will have to prepare a report that meets all the requirements in the Act, answer an online questionnaire and publish their report on a prominent place on their website. Failure to comply with the Act may be punishable with fines up to C$250,000. Directors, officers or agents may also be held liable under the Act.
MERGERS AND ACQUISITIONS
The consumer products industry has experienced significant mergers and acquisition ("M&A") activity in recent years, including acquisitions by both financial investors and strategic purchasers, as well as strategic consolidation across key markets to fuel growth.
More and more, alternatives to pure M&A are considered, including strategic partnerships, joint ventures and synthetic joint ventures (i.e. licensing and distribution), which allows consumer products businesses to expand their audiences and broaden market presence without incurring the costs of a full-scale acquisition. Such partnerships can take various forms, such as co-branding, joint marketing campaigns or exclusive product lines.
The following sets out certain acquisition structures and key legal issues for M&A in Canada, as well as key issues for consumer products businesses completing these transactions to consider.
M&A of Private Companies
A private business in Canada is typically owned by fewer than 50 shareholders and its securities are not offered or sold to the public.
An acquisition may take the form of an acquisition of assets or of the shares of the target (other transaction structures, such as an amalgamation or plan of arrangement, may also be considered). Tax and regulatory considerations should be carefully assessed before determining the desired transaction structure.
An asset transaction typically allows the purchaser to include or exclude certain assets and liabilities from the transaction. A sale of substantially all of the assets of a corporation generally requires the approval of 66 ⅔% of its shareholders.
Pursuant to a share purchase agreement, the buyer purchases the target corporation as a whole from its shareholders, including all of the assets and liabilities of the corporation.
It is not unusual that a business is sold through a sales process that is set up by financial advisors seeking the best offer for a business; however, transactions are also frequently negotiated directly between the parties.
M&A of Public Companies
Take-Over Bids
Harmonized provincial and territorial securities laws regulate the conduct of any take-over bid. A take-over bid is defined generally as an offer made to a person in a Canadian province or territory to acquire voting or equity securities of a class of securities, which, if accepted, would result in the acquiror (together with persons acting jointly or in concert with the acquiror) owning 20% or more of the outstanding securities of that class of securities of an issuer in Canada. A take-over bid must offer identical consideration to all security holders, with no "collateral benefit" to any security holder permitted, and must be open for acceptance for 105 days, subject to abridgement by the target company to 35 days. A take-over bid is subject to a mandatory tender condition that a minimum of more than 50% of all outstanding target securities owned or held by persons other than the bidder and its joint actors be tendered and not withdrawn before the bidder can take up any securities under the take-over bid. The take-over bid must also be extended by the bidder for at least an additional 10 days after the bidder achieves the minimum tender condition and all other terms and conditions of the bid have been complied with or waived.
The bidder must provide security holders of the target company with a circular containing prescribed information about the offer, as well as prospectus-level disclosure about the purchaser (including pro forma financial statements) if its securities form part of the consideration being offered. The board of directors of the target company must also send a circular to security holders, which includes the board's recommendation as to whether the security holders should accept the offer or, if the board declines to make a recommendation, an explanation of why no recommendation has been made. Toronto Stock Exchange ("TSX") requirements will also apply in certain circumstances. For instance, if the bidder is a TSX-listed company and is issuing shares under the offer (whether structured as a take-over bid or as a "business combination" as discussed below) that would cause dilution to its shareholders of more than 25%, the TSX requires the bidder to seek approval from its own shareholders prior to completing such an offer. Certain take-over bids are exempt from compliance with the foregoing requirements.1
Footnote
1. These include: (i) transactions involving the acquisition of securities from not more than five security holders of the target company, provided that the price paid does not exceed 115% of the prevailing market price (or value of the securities if there is no published market), (ii) normal course purchases on an exchange at the market price not exceeding 5% of the issuer's outstanding securities in a 12-month period, (iii) the acquisition of securities for which there is no published market of a company that is not a reporting issuer and has fewer than 50 security holders exclusive of current or former employees and (iv) foreign take-over offers where, inter alia, the number of securities held beneficially by Canadian security holders is reasonably believed to be less than 10% of the total outstanding securities subject to the bid, and Canadian security holders are entitled to participate on terms at least as favourable as other security holders.
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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.
