Understanding the legalities of franchising your business in canada
Are you a United States franchisor looking to expand franchise operations into Canada? As a franchise law firm we often get asked by U.S. sales reps if they can sell a franchise in Canada using a United States franchise disclosure document (“FDD”).
Unfortunately, franchising in Canada isn’t that simple for a U.S. based franchisor. There are several practical and legal factors to take into account.
Deciding where to franchise your business in Canada also requires careful consideration because the laws are not the same in each province of Canada.
As attorneys in the United States, we partner with a Canadian franchise attorney and help clients determine whether they should franchise a business in Canada.
How franchises are sold in the United States
For purposes of this article, we assume that you understand how to franchise a business in the United States and you are looking to expand operations into Canada. If that is not the case, consider reading our article on the basic legal requirements to franchise your business in the United States.
The FDD is a creature of federal law in the United States, with additional requirements imposed at the stat level. Franchise specific laws enacted by each country in the global economy, and in some cases regions or provinces, can vary drastically.
How are franchises regulated in Canada?
Franchise law in Canada is governed by a combination of federal and provincial regulations. Like the United States, these laws are designed to ensure transparency, protect franchisees, and promote fair business practices within the franchise system.
In Canada, the Competition Act governs competition and antitrust issues at the federal law. It aims to promote and maintain fair competition in the Canadian marketplace, prevent anti-competitive practices, and protect consumers. However, the Competition Act does not specifically regulate franchises.
Instead, franchise specific laws are the province level. Certain provinces have enacted specific franchise legislation that establishes requirements for disclosure, contract terms, and dispute resolution. Others do not specifically regulate franchises.
Franchise laws at the province level are similar to the requirements imposed under the FTC’s franchise rule, with the addition of certain disclosures. However, adherence to Canadian franchise law can be a bit tricky for American franchisors because the Canadian document is more of a living document tailored to each prospect as opposed to a more uniform disclosure.
Law by Province
Provinces with franchise specific Laws
- Ontario – The Arthur Wishart Act
- Alberta – Franchise Disclosure Act
- British Columbia – Franchise Act
- Quebec – The Quebec Civil Code (Chapter 24)
- Manitoba – Franchise Act
These provinces all require certain disclosures and provide certain protections for franchisees to ensure they are adequately informed when they purchase a franchise.
One of the most powerful tools under Canadian franchise law is that franchisors – and their executives – can be held liable for damages in the event of failures in the disclosure process. As mentioned above, these requirements can be nuanced as FDD’s need to be tailored to each prospect and each province. In some cases, for up to 2 years.
Franchisees also have certain statutory rights to rescind the agreement if disclosures are not complete.
Provinces with no franchise specific Laws
- New Brunswick
- Nova Scotia
- Prince Edward Island
- Newfoundland
- Labrador
These provinces do not have specific franchise laws, but that does not mean franchisors are without oversight. General principles of contract law and consumer protection apply, and may also be augmented by the common law. Further, some of these provinces are considering franchise specific laws, so the landscape can shift.
Franchisors should always ensure they are fair and transparent to avoid legal issues related to misrepresentation or bad faith practices.
Even Technical violations can pose significant risk
Canadian Courts have taken a highly technical approach to compliance with franchise laws. This has resulted in franchisees being able to get out of franchise agreements, and recover damages based on their losses. This creates a significant risk for franchisors and their business leads.
In Canada, officers, directors and others involved in the sales process can be held personally liable.
In comparison to rulings in the United States, technical violations are material and provide franchisees with significant leverage. For example, in Hi Hotel Limited Partnership v. Holiday Hospitality Franchising Inc., 2008 ABCA 276 (CanLII) an Alberta Court found that a failure to obtain the franchisees signature on a disclosure certificate rendered the entire disclosure of no consequence.
Canadian Courts have also found violations where the disclosures were not properly tailored to a prospects desired location type. We are not Canadian attorneys, so even as attorneys, we must parter with Canadian attorneys with specialized knowledge in franchise laws, because even a technical disclosure failure can result in financial and legal ruin.
Consider reading this Alberta law review article discussing materiality.
Can I sell a franchise to a Canadian Resident If their franchised Location will be in the United States?
The United States is an attractive location for business owners in the global landscape. Franchise opportunties often serve as the basis for E-2 Visa applications. The commitment required in the franchise context makes it an attractive option for immigrants searching for opportunity in the United States.
Naturally, sales reps often ask if they can sell a U.S. Franchise to a prospect located in Canada.
Generally, if the franchised business will be owned and operated in the United States, then our franchise laws will apply at the federal and state level. This means that a franchisor would disclose their FDD and prepare franchise agreements based on the state where the business will be owned and operated.
This does not mean a franchisor is free and clear from liability if they make errors or misrepresentations in the sales process, but United States franchise laws will apply in terms of permitting disclosure of the FDD. The franchisor will need to ensure they are permitted to offer franchises in the state where the franchised business will be owned and operated.
Meet the Author
Derek A. Colvin
Derek is a graduate of Penn State Law and Old Dominion University. He started his legal career in public service as a prosecuting attorney before entering private practice. He currently serves business clients as a partner at Waldrop & Colvin, the law department for your business. His practice focuses on SMB client legal services and franchising.
Derek is laser-focused on delivering efficient and effective solutions for business legal needs. As a seasoned litigator set on thinking critically and communicating effectively, Derek is well-suited to advise and protect your business as an independent owner, franchisor, or franchisee.
Derek A. Colvin offers a free 15 minute consultation.
You can call or email Derek Colvin directly or you can schedule a video conference today!
