When it comes to making money, franchise agreements can be a powerful tool in expanding to wider markets, ensuring the quality and flexibility of the workplace, and increasing profits overall. According to the Canadian Franchise Association, this model of business is the twelfth largest sector of the economy, encompassing approximately 1,200 brands and 76,000 locations. This makes it a very desirable market to be a part of. However, there are many nuances and challenges regarding franchise agreements in Canada. There are several levels of business sales tax and unique franchise laws that impact a franchise’s ability to operate.
For more information about tax law in Canada, consider speaking with an experienced tax lawyer from Jeremy Scott Law by calling (902) 403-7201.
Franchise Disclosure Act
Canadian franchise law is designed to protect the good faith between franchisors and franchisees. These laws are generally for the protection and benefit of the franchisee, as they are the smaller and more vulnerable entity.
The primary way these entities are protected is via the Franchise Disclosure Act. This act requires franchisors to provide a disclosure document, sometimes called a franchise disclosure document, to the potential franchisee. This document outlines all of the relevant facts and details that may affect the individual’s decision to purchase the franchise, ideally preventing the franchisee from agreeing to a purchase without crucial information.
The contents of this document may vary between provinces, but some categories include the background of the franchisor, the potential material costs to establish a franchise, information about the policies and operation of the franchisor, and many others. Failure to provide all relevant information to the sale of the franchise may not be in line with Canadian franchise law.
Tiers of the Canadian Tax Code
One may also benefit from familiarizing with the taxation system that Canada employs. Franchises may be expected to pay several different taxes to operate in Canada, each on a different aspect of doing business.
Goods and Services Tax and Harmonized Sales Tax
Most businesses will be expected to pay either the Goods and Services Tax (GST) along with federal taxes or the Harmonized Sales Tax (HST). Different provinces may use different taxation models.
Any sort of product, service, or intangible property will likely fall under the GST and is therefore taxable at a certain rate. In addition to GST, the individual must also pay the federal tax on the same product.
However, some provinces have harmonized their GST with the federal tax to create the HST, meaning that companies and individuals pay the federal tax along with the Goods and Services Tax for greater convenience. Understanding the difference between these two models can help inform a franchise agreement decision.
Corporate Tax
To remit the requisite tax, whether your province requires GST, HST, or a province-specific rate, the corporation must file a corporate tax return. This is where the federal and provincial tax amounts are calculated for the business’s fiscal year. These taxes treat the franchise as a distinct entity, charging on the franchise’s taxable income.
Any salaries or dividends paid to the owner of the franchise will be paid on the owner’s personal tax report, not on the franchise’s.
Payroll Tax
Employers within a franchise will also need to consider payroll taxes. Many corporations are responsible for withholding and remitting income taxes for their employees. The corporation may need to make regular payments to the Canadian Revenue Agency on behalf of those working for them.
This may require employees to file a Federal TD1 form to specify their desired withholdings to their employer. After this form is filled out, it falls to the responsibility of the employer to withhold those funds from the employee and use them to cover taxes that may include federal income tax, provincial income tax, Canada Pension Plan, and employee insurance premiums.
Provincial Differences
While this provides a general model for the tax implications of franchise agreements in Canada, several complications at the province level may affect a business’s taxes. For example, not every province uses the same taxation model, and some have specific laws regarding franchise disclosure documents.
According to the Retail Council of Canada in 2024 Alberta, the Northwest Territories, Nunavut, and Yukon require GST. New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, and Prince Edward Island all require HST. Whereas British Columbia, Manitoba, Quebec, and Saskatchewan require a combination of GST and Provincial Sales Tax or something else unique to that province.
To learn more about the implications of Canadian sales tax in business, consider reaching out to an experienced Canadian Tax lawyer from Jeremy Scott Law.
Foreign Franchisors in Canada
In light of this, Canada is becoming increasingly appealing to foreign franchisors who want to expand into Canada. There is a highly eligible workforce, a steady economy, and business practices and trends that tend to align with other Western business models. However, franchise agreements work in a slightly different way when crossing country borders.
Primarily, one must consider the legal complications at the federal and provincial levels. At the federal level, there is not much interest in policing the activity of franchises, although there are several laws and statutes governing the relationship between franchisors and franchisees. This attentiveness varies at the provincial level, with some provinces enacting and enforcing franchise legislature and others refraining from doing so.
There is also the topic of franchising models to consider. Some companies may opt for a direct franchise in which the franchisee operates directly under the foreign franchisor. However, master franchising is slowly growing in popularity. In this model, the foreign franchisor grants a “master franchisee” the power to sub-franchise and effectively operate as their own franchisor to other individuals.
Frequently Asked Questions
These are some frequently asked questions on the interaction of business sales tax in Canada and franchise agreements.
What Laws Regulate the Offering and Selling of Franchises?
In Canada, these interactions are governed by the Franchise Legislation, which primarily pertains to the provision of disclosure documents and the protection of good faith between the franchisor and franchisee.
Is Registration Require to Franchise in Canada?
Registration is not required to franchise in Canada, but disclosure documents must be made available to prospective buyers. While registration may not be required for the sale of a franchise, the company itself may require licensing to operate in Canada.
Contact a Canadian Tax Lawyer
The tax and business landscape of Canada may be complex, but it may be worth it for the thriving economy and business landscape of the country. Whether it be a Canadian business seeking to spread its influence and increase properties or a foreign company expanding into Canada, there are many unique opportunities to be found. To learn more about the nuances of the Canadian tax code, consider scheduling an appointment with an experienced tax lawyer from Jeremy Scott Law by calling (902) 403-7201.