Expanding Your Franchise Into Canada: Key Legal Differences for U.S. Franchisors

To listen to an audio recording of this article, click here.

Despite recent political commentary about Canada becoming America’s 51^st state, our nation remains a sovereign country with its own legal system, rule of law and judiciary. Historically, Canada and the United States have enjoyed close bilateral ties and share many cultural practices. Even with the bumps and blips of the current U.S. administration, Canada continues to be America’s second-largest trading partner and the top export market for U.S. goods.^[1]

Canada presents unique considerations for U.S. franchisors looking to expand their franchises north of the border. While Canada can offer a lucrative opportunity, it is important to understand a franchisor’s legal obligations and key differences in franchising requirements. Notably, a U.S. Franchise Disclosure Document (“FDD”) will not automatically be compliant in Canada and requires substantial revision by legal counsel well-versed in local franchising.

Provincial Franchise Laws: What U.S. Franchisors Need to Know

In contrast to the U.S., which has both federal and state-level franchise legislation, Canada only has provincial franchise legislation in seven provinces, namely Alberta, British Columbia, Manitoba, New Brunswick, Ontario, Prince Edward Island and Saskatchewan.^[2] No federal regime exists. Although provincial franchise legislation has more similarities than differences, there are some important nuances that should not be overlooked when franchising across provincial boundaries.

Also in contrast to the U.S., where federal and state regulators ensure compliance, Canadian provincial franchise legislation is self-policing. None of the provinces require registration and there is no Canadian regulatory body overseeing the franchise industry. Unlike in the U.S., where failure to comply can trigger potential fines and enforcement actions, non-compliance with provincial legislation in Canada can result in severe consequences, including rescission claims by franchisees and large damages awards.

Canadian FDDs: Disclosure, Customization and Executive Responsibility

As Canadian FDDs do not require initial registration or annual renewals, the cadence of disclosure updates in Canada versus the U.S. differs significantly. Canadian FDDs are constantly updated throughout the year as material changes occur in addition to being updated following the franchisor’s fiscal year-end. On the other hand, depending on which states the franchisor is franchising in the U.S., and whether or not those states require registration, U.S. FDDs are typically updated annually upon renewal of an expired registration.

As opposed to the highly standardized, prescriptive and form-driven disclosure requirements in the U.S., Canadian disclosure is much more principle-based, requires the disclosure of all “material facts” and has no prescribed format. As a result, Canadian FDDs are kept confidential and can vary widely between franchisors.

American FDDs are exceptionally detailed, but once the form has been completed and registered, they generally do not require further customization for each deal. However, Canadian FDDs require both franchisee and location-specific information due to the franchisor’s general obligation to disclose all material facts. As such, what is commonly referred to as “site-specific” by Canadian franchise counsel requires high degrees of customization for each FDD issued.

Lastly, Canadian FDDs require a signed certificate by at least one director and one officer, or two directors or two officers, unless the franchisor only has one named officer or director appointed. Personal liability from a materially deficient FDD can expose these executives, and it is important that they verify that all of the information in the FDD is accurate, clear and concise.

Conclusion

Despite these key differences, there are many similarities between franchising regimes in the U.S. and Canada. The underlying rationale of the regulatory framework in both countries is to provide the prospective franchisee with all of the information they require in order to make an informed investment decision on acquiring the franchise.

Additionally, both countries provide the prospective franchisee with a cooling-off period where the franchisor is prohibited from signing the franchise agreement or accepting any form of payment towards the franchise opportunity.

The Franchising Group at Aird & Berlis LLP advises on cross-border franchising and Canadian disclosure requirements. For further guidance, please contact the author or refer to the Franchising section of Doing Business in Canada, an Aird & Berlis publication.

[1] TD Economics - Setting the Record Straight on Canada-U.S. Trade.