As franchising continues to penetrate new markets, the time has
never been better to explore international expansion into Canada.
With nearly half of all new retail businesses in Canada being franchised
businesses, Canada has established itself as a leader in the franchising
industry. Whether franchisors are considering expanding into Canada
for the first time, or are seasoned international franchisors, there
is much to learn about successful franchising in Canada, including
a variety of business and legal issues relating to: cultural challenges;
disclosure compliance; anti-trust laws; and intellectual property
protection, to name but a few.
Canada is a confederation made up of ten provinces and three territories.
Franchisors operating in Canada are subject to both federal and
provincial law, which may vary from province to province. The province
with the most notable differences is Quebec. Quebec is predominantly
French-speaking, and while the majority of Canada is governed by
the common law, all contractual relationships in Quebec are governed
by its Civil Code. In addition, all public signage, posters and
commercial advertising must be either solely in French or in French
and another language with the French wording being markedly predominant.
In addition, all employees in Quebec have the right to carry on
their activities in French. Thus, a franchisor intending to operate
in Quebec must take the necessary steps to adapt its system so that
it can be successful in a unique legal, linguistic, and cultural
Currently only two provinces in Canada, Alberta and Ontario, require
a franchisor to deliver a prescribed form of disclosure document
to a prospective franchisee before it can execute a franchise agreement.
The disclosure documents do not have to be registered with a regulatory
body, and the franchisors enjoy substantial freedom in structuring
their contractual agreements and selling their franchises. However,
it should be pointed out that many business practices customary
in franchising are subject to regulation by both federal and provincial
laws of general application. The remainder of this article will
touch on some of the more significant issues that impact generally
Alberta's franchise law allows for a "wrap-around" document
to a disclosure document prepared in accordance with the laws of
another jurisdiction (for instance a UFOC) to conform to Alberta's
requirements. Ontario, however, does not provide for this type of
disclosure document, and a foreign disclosure document would require
modification to comply with Ontario franchise legislation.
Language, cultural, judicial and legislative practices and requirements
in Canada often require changes to standard foreign jurisdiction
franchise agreements before they can be used effectively in Canada.
The list below, while not exhaustive, illustrates a number of common
items to be considered by Canadian counsel:
- Language differences between foreign franchisor's country and
- Currency selection and exchange rate controls;
- Repatriation of funds and withholding taxes;
- Pricing of supplies and inventory;
- Trade-mark and software protection;
- Termination procedures and dispute resolution procedures;
- Non-Competition restrictions;
- Operating Manuals; and
- Governing law.
It is obviously critical that a foreign franchisor should obtain
protection of its intellectual property in Canada. A franchisor
contemplating international franchising should not assume that its
trade-marks will necessarily have the same degree of distinctiveness
in Canada. The federal government has jurisdiction over trade-mark
matters in Canada. Under the Trade-marks Act, an application for
registration of a trade-mark may be based on use in Canada, proposed
use in Canada, or registration and use abroad. The Trade-marks Act
provides that registration of a trade-mark gives the registrant
the exclusive right to use the trade-mark across Canada.
Generally, a foreign franchisor wishing to expand into Canada can
do so through a number of structures, including: franchising directly
from the foreign-based franchisor corporation to franchisees in
Canada; establishment by the franchisor of a branch or subsidiary
in Canada; joint venture partner in Canada; master franchise agreement;
and development agreement. It is essential that the foreign franchisor
consider all business and tax implications for each model as well
as such commercial considerations of: income tax; withholding tax;
and repatriation of funds. There are additional legal considerations
in determining the business structure, such as providing notification
to the federal government of the establishment of Canadian business
by foreign based entities.
A franchisor must make certain that labels on products to be sold
in Canada are accurate and meaningful; in both French and English;
and express all measurements in metric units. There are also special
labelling requirements for the sale of food, drugs and medical services.
Foreign franchisors whose franchisees are required to sell pre-packaged
products to consumers must be certain that such products are properly
marked and labelled for sale in Canada.
Canada's anti-trust laws are found in the federal Competition Act,
which sets out certain offences reviewable and that are criminal
in nature. In connection with franchising, and in particular the
Canadianization of foreign franchise documents, changes should be
made to these documents to reflect specific Canadian anti-trust
laws dealing with tied-selling, market restriction, exclusive dealing
and price maintenance.
Franchisors in virtually every country are now devoting an increasing
portion of their resources and energies to expanding beyond their
base to growing markets abroad. Canada has a well established tradition
of franchising and it may well be that Canadian expansion is the
next logical step for many successful franchisors. Not only does
Canada offer a strong economic environment, but the legal framework
for franchising is very encouraging for foreign franchisors. However,
in the planning and implementation phases, it will be important
to seek advice from a Canadian franchise lawyer who is experienced
in dealing with international franchise systems.