Franchising Comparative Guide

• Published date: 28 July 2021
• Subject Matter: Corporate/Commercial Law, Franchising
• Law Firm: Jones & Co.
• Author: Mr Paul Jones and Katya Logunov

1 Legal and enforcement framework

1.1 Which legislative and regulatory provisions govern franchising in your jurisdiction?

There is no federal franchise legislation in Canada, as the regulation of franchising falls within the provincial jurisdiction. To date, six Canadian provinces have enacted franchise statutes and respective regulations: Alberta, British Columbia, Manitoba, New Brunswick, Ontario and Prince Edward Island (the 'disclosure provinces'). These franchise statutes (collectively, the 'Franchise Acts') are fairly harmonised, but not identical.

The province of Quebec does not have franchise-specific legislation. However, the Civil Code of Quebec governs many aspects of the franchise relationship, including pre-contractual disclosure, the duty of good faith, franchise agreements, securities interests and leases.

Depending on the industry in which the franchise concept operates, various federal, provincial and municipal rules may apply, such as import restrictions on dairy products, food labelling and calorie disclosure requirements, waste disposal and professional certification.

1.2 Do they apply to foreign franchisors entering your jurisdiction or only to domestic franchises?

The provincial Franchise Acts apply equally to domestic and foreign franchisors.

1.3 Do any special regimes apply in specific sectors?

Some sectors of the economy have rules and restrictions that should be noted by franchisors. For example, imports of milk, cheese, eggs and poultry to Canada are controlled through import controls and high tariffs. Franchisors in the food and restaurant industry may need to revise their supply chains if they rely on these products in their menus.

The sale of alcohol is under strict provincial control in Canada. Franchisees may need to go through a lengthy process to obtain all required alcohol licences for their establishments.

1.4 Which bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?

There is no federal or provincial government body responsible for the enforcement of the Franchise Acts. The statutory rights granted by the Franchise Acts are enforced by the courts.

1.5 What is the regulator's general approach in regulating the franchise sector?

There is no regulator of the franchise sector in Canada.

1.6 Are there any trade associations for the franchise sector? If so, what are the conditions for membership? What are the commercial implications of not being a member?

The Canadian Franchise Association (CFA) is a national trade association that represents both franchisors and franchisees. Membership is not mandatory. The CFA:

• provides educational services and various resources for its members;
• advocates before the federal and provincial governments on behalf of the franchise industry; and
• provides lead generation and promotional opportunities.

Members of the CFA are expected to comply with its Code of Ethics, which promotes compliance with good disclosure practices and adherence to non-discriminatory practices.

In Quebec, which is predominately francophone and culturally distinct from other Canadian provinces, the Quebec Franchise Council is a provincial association representing the franchise industry.

2 Franchise market

2.1 How mature is the franchise sector in your jurisdiction?

The Canadian franchise sector is quite mature. Canada has the second-largest franchise industry in the world, contributing about C$96 billion to the economy every year and employing one out of 10 working Canadians. More than 75,000 franchise units operate throughout Canada.

There is a network of suppliers that supports the franchise industry, including financial services, legal services, franchise consultants and brokers. Canadian banks have established specialised franchise departments to handle financing for start-up franchised businesses.

2.2 In which sectors is franchising most common?

According to the Canadian Franchise Association (CFA), there are an estimated 1,300 franchise brands operating in Canada in most sectors of the economy, including restaurant, automotive, hospitality, real estate, professional services industries and many others. Top franchise industry sectors include food services, hospitality, real estate and business services, commercial and residential services, and arts, health and fitness.

2.3 Who are the biggest and most successful franchisors in your jurisdiction? How are they typically structured?

The biggest Canadian franchisor is Tim Hortons, a domestically grown fast-food restaurant concept known for coffee and doughnuts. In 2014, it was acquired by Restaurant Brands International. Other big Canadian franchisors include A&W Food Services, Pizza Pizza and Country Style. Some of the major international franchisors include Subway, McDonalds, Jan-Pro, RE/MAX, KFC and Dairy Queen.

Domestic franchisors in Canada grew primarily through unit franchising. Master franchising is also used, but currently, the majority of US brands are growing in Canada through unit franchising.

3 Franchising models

3.1 Is master franchising or the development model most common in your jurisdiction?

Master franchising and development arrangements are quite common, particularly when expanding into Quebec. Because of the distinct culture, mixed common law and civil law system, different consumer tastes and mostly French-speaking population in Quebec, both Canadian and international franchisors often use some variation of a development arrangement using a developer familiar with the region and fluent in French when doing business in this province.

'Master franchising' is understood in Canada as an arrangement in which the franchisor grants the master franchisee the right to sub-license the brand to local candidates and act as a sub-franchisor within a specific area, either exclusive or non-exclusive. Often, the master franchisee is required to open one or more 'pilot' locations before being able to sub-franchise.

An alternative to master franchising is area development or the area representation model. These terms are often used interchangeably, but generally:

• 'area development' refers to an arrangement where the developer is granted rights to open a number of units in a specific region; and
• the 'area representation model' usually involves an area representative acting as a scout to find, train and/or supervise potential franchisees, who will then contract directly with the franchisor.

In other words, an area developer is usually a multi-unit franchisee that agrees to open a certain number of units within its region following a development schedule; while an area representative is a sales agent that neither operates units itself nor has the right to sub-franchise. A combination of area development and area representation models is also possible.

3.2 What other models of franchising are commonly used in your jurisdiction?

Unit franchising is very popular with Canadian and international franchisors. Franchisors from the United States often start their international expansion by crossing the border into Canada through unit franchising, because the business environment, culture, legal system and consumer preferences in Canada are similar to those in the United States.

Joint venture franchising can also be used, but is less popular than unit franchising, master franchising or the development models.

3.3 What are the potential advantages and disadvantages of these different models?

The master franchising model has the advantage of having a local partner in Canada that is familiar with the market and will support franchisees on the ground. With a carefully selected master franchisee and a properly drafted master franchise agreement, the franchisor can achieve a balance between keeping control over the brand standards and development and adapting the system to local requirements. However, the franchisor will have to give up a share of profit and at least some degree of control when using the master franchise model.

The unit franchising model gives the franchisor more control over the system expansion and adaptation in Canada and avoids the need to use intermediaries. It is easier to set up and wind down than a master franchise relationship; but unit franchising will require more time and resources to manage from the franchisor's headquarters and generally offers slower growth than master franchising or the development models.

Different variations of the development model (area development, area representation or a combination of both) can be used to offset the particular franchisor's weaknesses (eg, the lack of familiarity with the market) and leverage the system's strengths to balance the risks and benefits of expansion to Canada. For example, using an area representative to find, train and supervise Canadian franchisees can give a foreign franchisor 'boots on the ground' while maintaining contractual privity with the individual franchisees.

Canadian legal system allows the franchisor significant flexibility in structuring its expansion to Canada.

3.4 What specific considerations should be borne in mind in the case of cross-border franchising into your jurisdiction?

Foreign franchisors should keep in mind that Canada is a large country, but the majority of the population is concentrated in the southernmost part along the border with the United States. In addition, Canada should not be viewed as a single, homogeneous market. Instead, it is prudent to divide Canada into several distinct regional markets:

• Western (British Columbia);
• the Prairies (Alberta, Saskatchewan, Manitoba);
• the Atlantic provinces (Newfoundland and Labrador, New Brunswick, Prince Edward Island and Nova Scotia);
• Quebec;
• Ontario; and
• the North (Yukon, Northwest Territories and Nunavut).

If using the master franchising or the development model, giving away exclusive rights to the whole country to a single entity should generally be avoided, unless the candidate truly has the financial strength and...