Ring. Ring … Hello. This is the usual start to an initial discussion and consultation with a U.S. franchisor or its in-house counsel, who want to get started with their planning for franchising in Canada. An initial telephone discussion to highlight the issues to be considered will likely cover most of the issues discussed below. The two issues which require primary discussion and initial decisions involve Canadian intellectual property protection, and choosing the appropriate tax and business structure.
Intellectual property is protected on a country-by-country basis. A U.S. franchisor must take steps to register its trademarks in Canada. This may include registering its Internet domain names in the “.ca” country-level domain. Dependent upon the nature of the business, the nature of the franchise system and the nature of the materials to be provided to the franchisees, patent, copyright and industrial design protection in Canada may also need to be discussed.
A fuller discussion of these issues will also involve matters such as choice of law, choice of forum and alternative dispute resolution processes. Trademarks, copyrights, patents and industrial designs, being Canadian forms of intellectual property protection covered by Canadian legislation, will most likely have to be the subject of Canadian law and jurisdiction.
As a first step in dispute resolution, mediation and, failing success in mediation, arbitration should also be discussed. If arbitration is to include any aspect of intellectual property protection, the arbitration clause may also have to be designed to include references to Canadian law and jurisdiction.
Often, when a business is expanding across borders, a franchisor may wish to segregate its international or individual country franchise operations into separate corporations. This may involve incorporating a subsidiary for carrying out the Canadian franchising. The franchisor must also choose the type of corporate vehicle, and whether the subsidiary will be incorporated in Canada or the United States.
The U.S. franchisor may choose to only grant franchises in Canada, or to establish one or more corporate-owned operations, in addition to granting its franchises in Canada. In the case of establishment of corporate-owned operations in Canada, the U.S. franchisor will have to consider the fact that by having a “permanent establishment” in Canada, the franchisor corporation will become subject to the Canadian tax regime. This may be an additional incentive to incorporating a subsidiary for carrying out the Canadian franchising.
The franchising corporation may also require extra-provincial registrations in those provinces in which it will be carrying on business through such corporate-owned operations. The filing of a Notification to Establish a New Canadian Business with the Investment Canada Agency will also likely be required.
Inextricably involved in such initial discussions will also be the subject of withholding tax on cross-border income-related transactions, such as the payment of initial franchise fees and royalties by Canadian franchisees to the U.S. franchisor, and structuring the payment provisions under the franchise agreement to take maximum benefit of withholding tax rate reductions available under the Canada-U.S. Tax Treaty.
In addition to the above discussions of corporate structure and international taxation, issues such as currency exchange, currency conversion, electronic funds transfers and banking expenses will also have to be considered.
Lastly, where a subsidiary will be incorporated to carry on the franchising in Canada, there should be in place inter-corporate licences from the U.S. franchisor to its subsidiary, allowing the subsidiary to use and to grant sublicences to the franchisees for use of the franchisor’s intellectual property.
Once the initial considerations of IP protection, and tax and business structuring, have been discussed, the discussion can then move on to the issues related to carrying on business.
Such an initial discussion with U.S. franchisors often involves the type of franchise transaction contemplated. Will the U.S. franchisor carry on its franchising business in Canada by the grant of single-unit franchises; multiple-unit franchises; master franchising, either Canada-wide or regionally; area development agreements; area representation agreements; or through a joint venture?
Each of these structures have different positive and negative factors, which go beyond the scope of this Article. However, it is likely that many of these structures may not be the same as those employed by the U.S. franchisor for its domestic U.S. franchising activities, and thus the creation of new forms of agreement may be required for carrying on these different types of franchise transactions.
Every U.S. franchisor is familiar with the topic of pre-grant franchise disclosure. This portion of the discussion will inevitably cover the fact that Ontario, Alberta and Prince Edward Island currently have franchise disclosure legislation in place, and that other provinces may well be adopting such legislation in the future, such as New Brunswick, where franchise legislation is currently pending.
The discussion will clarify that Canada’s franchise laws are disclosure only, that they involve no registration or other government filing or approval process, and that they do not include post-grant relationship laws directed at renewal, transfer, or termination.
Any discussion of Canadian franchise legislation will also include discussion of whether or not a U.S. franchisor can use a wrap-around disclosure document including its U.S. Uniform Franchise Offering Circular, or whether a specific form of disclosure document should be prepared for Canada, whether it be for each province separately, or for use Canada-wide.
This type of discussion usually also includes a discussion with the U.S. franchisor as to whether or not it wishes to disclose generally, even in provinces where there are no franchise laws. Such a decision may well affect the drafting of the Canadian disclosure document, either to include more Canada-wide information, or to at least include a prominently displayed disclaimer indicating to a prospective franchisee in a nonfranchise legislation jurisdiction, that the disclosure document has not been prepared for use in such a province or for compliance with any existing legislation in that province, thus pointing out to the prospective franchisee that it should obtain independent legal and financial advice as to whether or not the information contained in the Canadian disclosure document may be different for that franchisee’s home province.
Discussions of Canadian franchise legislation also include pointing out to U.S. franchisors the fact that the standard of disclosure for Canada is all material facts, including the items listed in the regulations to the various franchise statutes. This is a different standard of disclosure than a U.S. franchisor is accustomed to in preparing its Uniform Franchise Offering Circular; more like a securities standard of disclosure. This is a significant difference for some franchisors in terms of the preparation of their disclosure documents.
It must also be pointed out to U.S. franchisors that each of the provinces which currently have franchise legislation have statutory requirements of good faith and fair dealing in the performance and enforcement of franchise agreements. Quebec, under its Civil Code, also has a good faith standard, applicable to all contracts, including franchise agreements, which also extends to pre-contractual negotiations.
Each of the provinces which currently have franchise legislation also have statutory requirements regarding choice of law and choice of forum, including for arbitration proceedings. For claims enforceable under a provincial franchising statute, the choice of law must be of that province, and the choice of jurisdiction and venue must be in that province. Clauses in franchise agreements which are not in conformance with these provisions will be considered to be void. The absence of jury trials and treble damages awards in Canadian civil litigation are often further incentives for the U.S. franchisor to choose Canadian laws and Canadian courts generally.
There are various forms of exemptions under the Canadian franchise statutes which may interest larger, more mature franchisors with respect to available exemptions from the inclusion of their financial statements in the disclosure document. The Canadian franchise statutes also contain the “fractional franchise” exemption, with which U.S. franchisors will be familiar.
A further item of importance under this type of discussion, is if the U.S. franchisor chooses to incorporate a subsidiary corporation for carrying out its franchising in Canada, then all of its agreements, and the useable contents of its Uniform Franchise Offering Circular, will have to be amended to reflect the fact that the franchisor is a different entity, and that instead of the franchisor being the owner of the intellectual property and franchise system rights, it is in fact a licensee and sub-licensor of the same under such a corporate structure.
Another element of the U.S. franchisor’s decision to incorporate a subsidiary corporation for carrying out its franchising in Canada, will be the fact that the new, different entity will require its own financial statements, prepared to an audited or review engagement report standard, and hopefully reflecting a sufficient financial position so as not to appear to a prospective franchisee to be a mere financial shell of a corporation. Finally, under this topic, the U.S. franchisor’s franchise agreement and other agreements and documents will also have to be reviewed and likely revised, in order to conform them to Canadian laws and terminology.
U.S. franchisors are often concerned regarding protection of confidential information and trade secrets. An important difference under Canadian law is that operations and other manuals can be protected by registering the copyrights, without being required to place a deposit copy of the manual on file at the Copyright Office. Although U.S. copyright will extend, by international treaty, to also provide Canadian copyright protection for the franchisor’s manuals and other materials, registration of copyrights may still be desirable, given the ease of registration, and the fact that copyright registration adds strength to the process of enforcement against infringers.
U.S. franchisors will also want to know that non-disclosure and non-use agreements are in common use in Canada, and that such agreements can be entered into (in limited form) even before disclosure in all of the provinces which have franchise legislation, except for Ontario, where no agreements of any kind relating to the franchise can be entered into prior to disclosure and the expiry of the 14-day cooling off period. U.S. franchisors should be aware that labour and employment law issues affecting franchising are considerably different as between Canada and the United States. These are provincial matters, and there are inconsistencies among provinces, in both labour laws, and employee rights.
The use of confidentiality agreements with employees and independent contractors is common in Canada, and these generally are enforceable. For U.S. franchisors who wish to send their personnel across the border to provide services to their Canadian franchisees, there is also the need for immigration advice and consideration should be given to obtaining business visas for such personnel.
U.S. franchisors also need to be aware that advertising law differs in Canada in some respects, most notably in the field of comparative advertising, and in the fact that various provinces of Canada, as well as federal legislation, provide for more stringent rules regarding the holding of contests.
Any discussion about doing business in Canada must also include various bilingual issues. First, the Quebec Charter of the French Language exists to entrench and protect the French language rights of the people of Quebec. The Charter provides for the parties to enter into their contracts in English, if they bi-lingually agree to do so. However, the Charter requires the use of French in the workplace, including computer software, and generally in doing business in Quebec.
The rules under the Charter allow for the use of English as well as French, and usually with equal prominence, although not in all cases. For example, the Charter rules provide for the use of French in customer forms, sales literature, public signage, posters and commercial advertising, including on websites.
Many companies adopt French versions of their trademarks for use in the Province of Quebec. Corporate laws allow for the adoption of a French version of the corporate name of a corporation doing business in Canada, and this will be required for corporate registrations or incorporations in the Province of Quebec.
In addition to the Quebec Charter, where products are concerned, the U.S. franchisor must also be made aware of Canada’s federal packaging and labelling laws, generally requiring bilingual labelling content, in English and French, with both languages receiving equal prominence.
The laws governing real estate also differ somewhat between Canada and the United States. In Canada, the leasing of franchised locations by franchisors and subletting them to the franchisees is quite common. In some franchise systems, the franchisees contract directly with the landlord to lease the proposed franchised premises, but the use of landlord side agreements to protect the franchisor’s interests in such a situation is also common. Such a side agreement would either provide for certain clauses to be included or read into the lease between the landlord and the franchisee, or would provide that the landlord will grant to the franchisor certain rights to assume and take over the franchised location in the event of a default or a non-renewal by the franchisee. Another significant difference between Canada and the United States is in the field of personal information protection, namely Canada’s federal and provincial privacy laws. These are much more well developed in Canada than in the United States, and they affect the collection, use and disclosure of personal information gathered during the operation of the franchised business.
Privacy laws often present special issues and challenges in outsourcing, and in corporate structures such as the use of a subsidiary to franchise in Canada, where the franchise system rights belong to the U.S. franchisor. Cross-border personal information transfer must be taken into account in privacy law compliance for franchise systems operating in Canada.
Lastly, the field of anti-trust differs substantially between Canada and the United States. Generally speaking, Canada has much less well developed anti-trust laws than those of the United States. The two aspects of Canadian anti-trust law which are most often discussed in the franchising context, are restrictions on retail price setting under the federal Competition Act, and the provisions under the same Act governing misleading and comparative advertising.
This is by no means an exhaustive list, however, a phone call from a prospective U.S. franchisor wishing to expand its franchise business into Canada, which covers all or a majority of these issues, will be a most fruitful and informative phone call, as well as a lengthy one, representing a good start in business planning for the U.S. franchisor’s Canada expansion.