A business may be carried on in Canada in various forms. Most commonly, a business being carried on in Canada by a foreign corporation would be conducted using a corporate vehicle, either through a Canadian incorporated subsidiary or through a branch operation of the foreign corporation. Depending on the nature and scope of the activity, the degree of limited liability required, certain tax and other considerations, the business activity could also be conducted through a sole proprietorship (for an individual), a partnership or a joint venture. It is also possible, in some cases, to supply goods and services to Canadians through various contractual arrangements, such as distributorship agreements, without actually setting up a business in Canada. The legal implications of the respective vehicles available for carrying on business in Canada are summarized below.

General

The cooporate form is a flexible structure for business organizations. It is possible to utilize various classes of shares and share conditions to provide different levels of participation, control and risk-taking in the corporation. Once established, a corporation can obtain additional funds by the sale of unissued treasury shares or by the issuance of debt. Most corporations in Canada are “private” corporations, generally having fewer than 50 shareholders, which carry restrictions on the right to transfer the shares of the corporation (the most common restriction is obtaining the consent of a majority of the directors or the shareholders to any proposed sale or transfer of shares) and which expressly prohibit any invitation to the public to subscribe for securities of the corporation. Non-private or “public” corporations are generally more widely held and the shares of such corporations are often listed on a stock exchange. For more information concerning the financing of Canadian operations, including the legislative framework governing the distribution of securities in Canada, see the section below entitled “Financing Canadian operations”.

Canadian subsidiary corporation

If a company decides to operate in Canada through a Canadian subsidiary, there is a choice of jurisdictions for the incorporation between the federal Canada Business Corporations Act (“CBCA”) and the equivalent legislation of the provinces of British Columbia, Alberta, Ontario and Quebec. Where the principal activities are to be, at least initially, the choice would be between the CBCA and the British Columbia Business Corporations Act (“BCBCA”), the Alberta Business Corporations Act (Alberta) (“ABCA”), the Ontario Business Corporations Act (“OBCA”) or the Quebec Business Corporations Act (“QBCA”). In each of these jurisdictions, the new entity will have the flexibility and the facility to carry on business throughout Canada, subject to complying with registration and/or licensing requirements of any particular province in which the corporation proposes to carry on business.
In deciding whether to incorporate under the CBCA or provincial legislation, the type of business to be conducted by the corporation is one of the factors to be considered. For example, a corporation wishing to register as a venture capital corporation in British Columbia, as a railway company in Alberta, or as a small business development corporation in Ontario, must be incorporated under the relevant provincial legislation.
The principal distinction between a federal and a provincial corporation is that a federal corporation is usually entitled as of right to carry on business under its corporate name throughout Canada. A provincially incorporated corporation, on the other hand, is required to obtain an extra-provincial license or become registered in each province in which it proposes to carry on business, and such extra-provincial license or registration can be refused by another province, if the name of the provincial entity conflicts with the name of an existing incorporated corporation, licensed or registered in the other province. In Quebec, corporations are also required to adopt a French trade name in conformity with the Charter of the French Language. Accordingly, especially with provincially incorporated corporations, it may be advisable to clear the name and seek registration or licensing in the provinces in which the corporation expects to carry on business in the foreseeable future at the time the business is first established in Canada. A federal corporation is also required to obtain an extra-provincial license or registration in each province in which it “carries on business”, however, no province (except Quebec in very limited circumstances), can refuse to register the corporation. For more information on extra-provincial incensing, please read the “Foreign corporation – branch operation” section below.
The incorporation fee ranges from $100 to $360, depending on the jurisdiction. More information concerning the incorporation and organization of corporations in Canada is set out below under the heading “Incorporation and organization of corporations”. The tax consequences of using a Canadian subsidiary are outlined below under the section “Income tax considerations”.

Foreign corporation – branch operation

If a branch operation is to be established, the foreign corporation is required to register or become licensed as an extra-provincial corporation in each province in which it “carries on business”. The question whether any particular activity or group of activities will constitute “carrying on business” is not specifically defined in most cases, and is to be determined by reference to the particular facts and circumstances. Registration will clearly be required in any province in which the corporation maintains an office or other fixed place of business. The registration in any particular province will be subject to the acceptability of the name of the corporation and registration will be denied if such name is the same as, or closely resembles, the name of another corporation already incorporated or registered in the province. However, a corporation with an unacceptable corporate name may sometimes be registered to carry on business in a province under a different business name or style that is acceptable, without having to change its corporate name. In Quebec, foreign corporations are also required to adopt a French trade name in conformity with the Charter of the French Language. The fee payable for registration of an extra-provincial license is generally similar to that payable in respect of incorporation.

Incorporation and organization of corporations

 A.     Incorporation
To incorporate abusines under the CBCA, ABCA, OBCA or QBCA , articles of incorporation must be filed in the appropriate office along with the required fee. The articles of incorporation must provide certain information, including the name of the proposed corporation, its registered office, a description of the classes of shares, any restrictions on share transfers, the number of directors and any restrictions on the business that the corporation may carry on. The filing is an over-the-counter procedure and registration can usually be completed on the same date that the articles of incorporation are filed.
To incorporate a company under the BCBCA, a notice of articles, together with an incorporation application and the required fee, must be filed electronically with the Registrar of Companies. The incorporation application sets out the name of the company, the desired effective incorporation date, and the name and address of the incorporator, and includes a certification confirming that the incorporator has signed an Incorporation Agreement relating to the company. The notice of articles sets out the name of the company, the translation of the name (if any), the names and addresses of the initial directors of the company, the addresses of the company’s registered and records offices, a description of the authorized share structure of the company, and whether there are any special rights or restrictions.
B.     By-laws
Following the incorporation of a business under the CBCA, ABCA, OBCA or a QBCA, a general by-law to regulate the affairs of the corporation is passed. If desired, further by-laws relating to the regulation of the business and affairs of the corporation may be passed. Under the BCBCA, the articles are the general regulations which govern the internal affairs of the company (similar to the general by-law of a CBCA, ABCA or OBCA corporation). They set out: the terms of any special rights and restrictions attaching to shares of the company; any restrictions on the businesses to be carried on by, or the powers of the company; and any restrictions on share transfers. They may also contain special provisions permitted by the BCBCA.
C.     Directors
Each of the CBCA, BCBCA, ABCA, OBCA and QBCA, permit a corporation to have a flexible number of directors, being not less than one, or in the case of a reporting company/public corporation, no fewer than three. All CBCA, ABCA, OBCA and QBCA private corporations and BCBCA non-public companies must have boards of directors consisting of one or more directors. Under the CBCA, subject to certain exemptions (including uranium mining, book publishing or distribution, book sales, and film or video distribution for which the threshold is higher), only 25 percent of the directors need be resident Canadians (or if there are less than four directors, only one must be a resident Canadian). Under the OBCA, at least 25 percent of the directors must be resident Canadians (or if there are less than four directors, one director must be a resident Canadian). There are no director residency requirements under the BCBCA  or the QBCA, and the ABCA requires that at least one quarter of the directors be resident Canadians.

A “resident Canadian” is defined in the CBCA as:

  •   A Canadian citizen ordinarily resident in Canada;
  • A Canadian citizen not ordinarily resident in Canada who is a member of a prescribed class of persons; or
A permanent resident within the meaning of the Immigration and Refugee Protection Act (Canada) and ordinarily resident in Canada, except a permanent resident who has been ordinarily resident in Canada for more than one year after the time at which he or she first became eligible to apply for Canadian citizenship.
The corresponding definitions in the ABCA and the OBCA are essentially the same, except that they do not contain the exception found in the last two lines of the above definition.
Under the CBCA, 25 percent of the directors (or, if there are less than four directors, at least one of them) present at any meeting must be resident Canadians. Under the ABCA, at least one-quarter of the directors present must be Canadian residents.
The directors of a corporation are required to manage or supervise the management of the business and affairs of the corporation. The officers of a corporation undertake the day-to-day operations and affairs of the corporation. Directors have a fiduciary duty to act honestly, in good faith and with a view to the best interests of the corporation, and must also exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.Directors may incur personal liability in their capacities as directors under the common law and under an increasing number of statutory provisions, including the Income Tax Act (Canada), environmental protection legislation, employment legislation, and occupational health and safety legislation, as referred to elsewhere in this publication. For example, under the CBCA, BCBCA, ABCA, OBCA and QBCA, directors are liable to the corporation if they vote for, or consent to, a resolution authorizing certain corporate action contrary to those Acts, such as the declaration of a dividend or other distribution, at a time when there are reasonable grounds for believing that the corporation would be unable to satisfy a solvency test.
D.     Auditors
Both federal and provincial corporations are required to appoint an auditor, unless exempted. Generally, a corporation may be exempt from this requirement if the corporation is not a public corporation and all the shareholders consent to the exemption.
E.     Shareholders’ agreements
The shareholders of a corporation may enter into a shareholders’ agreement which provides for the conduct of the business and affairs of the corporation, regulates the rights and obligations of the shareholders to one another, and which may provide for rights of first refusal or other provisions dealing with the transfer of shares. Under the CBCA, ABCA, OBCA and QBCA, all of the shareholders may agree, under a “unanimous shareholders’ agreement”, to restrict in whole or in part, the powers of the directors to manage the business and affairs of the corporation, and to give to the shareholders the rights, powers and duties, which they have removed from the directors. The directors are thereby relieved of such duties and liabilities. This type of agreement might be used in a subsidiary corporation so that it is managed directly by the parent company with an active board of directors. Under the BCBCA, the articles of the company may restrict the powers of the directors and may transfer those powers, in whole or in part, to one or more other persons.
F.     Share capital
A share is a fractional part of the capital of a corporation which confers upon the holder a certain right to a proportionate part of the assets of the corporation, whether by way of dividend or upon a distribution on the dissolution of the corporation, and governs the right to vote at shareholder meetings. The corporation may issue more than one class of shares and may designate the shares in any way, unless restricted by the constating documents. There is no restriction on the number of shares of each class that may be issued by a corporation. Under the CBCA, ABCA and OBCA, the concept of par value shares does not exist and, therefore, shares are not expressed as having a nominal or specified value in dollars or other currency. Under the BCBCA and QBCA, the authorized capital of a company may consist of shares with or without par value. The share capitalization of a corporation may be very flexible and can be tailored to meet its specific requirements. Very simple share provisions will usually suffice in the cases of a small or closely-held corporation.
If the share capitalization of a corporation consists of only one class of shares, all the shareholders will have equal rights: the right to vote at any shareholders’ meeting; the right to receive the remaining property of the corporation on dissolution; and the right to receive any dividend declared by the corporation. If the articles provide for more than one class of shares, the above rights must be attributed to at least one of the classes of shares, but it is not necessary that one class have all of these rights. If there is more than one class of shares, or if there is only one class of shares with rights in addition to the fundamental rights described above attaching to the shares, these rights and conditions must be set out in the articles of a CBCA, a BCBCA, an ABCA, an OBCA and a QBCA corporation. The rights that may be attached to the shares of a class are virtually limitless, but some of the common provisions are as follows:
  • The right to cumulative, non-cumulative, partially cumulative or fully participating dividends;
  • A preference over another class or other classes of shares as to the payment of dividends; 
  • A preference over another class or other classes of shares as to the repayment of capital upon the dissolution of the corporation;
  • The right to elect a specified number of directors, or other special voting rights or restrictions; 
  • The right to convert a certain class of shares into another class of shares or a debt obligation; 
  • The right of the corporation, at its option, to redeem all or part of the shares of the class; and 
  • The right of the shareholder, at its option, to require the corporation to redeem its shares (this form of redemption is known as retraction).
It is also possible to have several series of shares within one class of shares. The use of these series is advantageous where the directors wish to issue shares with certain differing characteristics over an extended period of time, without obtaining the shareholders’ approval of the particular characteristics of each series when the series is issued.

Unlimited liability companies

In recent years, the unlimited liability company (“ULC”) has become popular as a hybrid entity that can offer US investors certain tax advantages. As a company, a ULC will be treated as a taxable Canadian corporation under the Income Tax Act (Canada) and must, therefore, file Canadian income tax returns. However, it also is eligible for partnership tax treatment in the US; thereby affording US shareholders the same US tax treatment as US limited liability companies). The “check the box” rules adopted by the US Internal Revenue Service on January 1, 1997, provide that any Canadian corporation or company formed under any federal or provincial law, which dictates that the liability of all the members of such corporation or company will be unlimited, can qualify for partnership treatment, regardless of what other “corporate characteristics” it may possess.
Under the “check the box” process, ULCs can, for US tax purposes, elect either corporate or flow-through status by checking the appropriate box on the election form. There are a number of US tax advantages to opting for the flow-through treatment, including enabling the US investor to use any anticipated start-up losses in the Canadian operation for US tax purposes.
ULCs are incorporated under the ABCA, the BCBCA and the Companies Act (Nova Scotia) in a manner similar to the other corporate statutes in Canada. It is also possible to convert existing corporations incorporated under the CBCA, and most of the other provincial corporate statutes, into a ULC by, in the case of Alberta, having such corporation continued under the laws of Alberta as a ULC and, in the case of British Columbia or Nova Scotia, having such corporation continued under the laws of either province and then amalgamated with a newly incorporated shell ULC (or, in the case of British Columbia, having such continued corporation alter its notice of articles). The costs for registering a ULC in Alberta are significantly less expensive than the costs for incorporating and registering a Nova Scotia ULC.
As with ABCA corporations, one quarter of the directors of an Alberta ULC must be resident Canadians. There are no restrictions on the residency of directors of British Columbia or Nova Scotia ULCs.
The main difference between ULCs and other federal and provincial corporations is that the shareholders of a ULC have unlimited joint and several liability for the obligations of the ULC upon its dissolution. Therefore, prospective shareholders should consider carefully whether or not to use these vehicles, or if intervening liability entities could or should be used to reduce their exposure. For example, a US investor could interpose a “stopco” holding corporation between it and the ULC, and thereby effectively limit the US investor’s liability for the ULC’s obligations. Shareholders of Alberta ULCs may enter into unanimous shareholder agreements, whereas Nova Scotia and British Columbia do not recognize unanimous shareholder agreements. As a result, any limitations on directors’ authorities of Nova Scotia ULCs must be set out in the publicly filed articles of association, and any limitations on directors’ authorities of British Columbia ULCs must be set out in its articles.

Under each of the ABCA, BCBCA and the Companies Act (Nova Scotia), the members of a ULC can convert the ULC into a limited liability company and, if desired, continue the company under the CBCA or the laws of another provincial jurisdiction. Members of a ULC may choose to change the nature of the company in circumstances where it has become profitable and there is no further need to have it taxed on a flow-through basis for US tax purposes.

As a result of recent amendments to the Canada-US tax treaty, the use of ULCs in some circumstances may not be as tax-effective as they have been in the past.

In addition to the corporation, other forms of business organization may be used as vehicles to carry on business in Canada, some of which are briefly discussed below.

Sole proprietorships

A sole proprietorship exists where an individual is the sole owner of a business and there is no other form of business organization, such as a corporation, used as a vehicle to carry on the business.

All benefits gained and all obligations incurred from the sole proprietorship accrue to the sole proprietor. All income and losses of the proprietorship accrue to the individual and are taxed at the tax rate applicable to the individual. In contrast with the limited liability of shareholders of a corporation, there is no limited liability for sole proprietorships. The personal assets of the sole proprietor may be seized to satisfy any obligations of the proprietorship.

The sole proprietorship is a simple arrangement for carrying on business. There are few legal formalities required to create or operate a sole proprietorship. Before beginning to carry on a business as a sole proprietorship, attention should be given to any federal, provincial or municipal licensing requirements. In addition, a sole proprietor who engages in certain businesses in British Columbia, or in any business in Alberta, Ontario or Quebec, using a name or designation other than the individual’s own name, must register a declaration in prescribed form with the relevant government authority.

Partnerships

In British Columbia, Alberta, Ontario and Quebec, general partnerships and limited partnerships may be formed to carry on a business enterprise. In a general partnership, the liability of each of the partners is unlimited. In a limited partnership, the liability of one or more of the partners (general partners) is unlimited, and the liability of one or more of the partners (limited partners) is limited to the amount that the limited partner contributes (and, additionally in British Columbia and Quebec, and alternatively in Alberta, the amount the limited partner agrees to contribute) to the business of the partnership. A contribution may be one of money or property, but not services.

Generally, for both limited and general partnerships, the income or losses of the partnership are determined, for income tax purposes, at the partnership level and then allocated to the members of the partnership. The income or losses are then taxable in the hands of the partners.

  1. General Partnerships

To be considered a general partnership, there must be a relation between persons carrying on a business in common (which can be in the nature of an ongoing business or a specific transaction) with a view to profit (which excludes charitable and cultural organizations). The relation between the persons may be established by written or verbal agreement, or be implied by the circumstances.

A general partnership carries on business under a firm name and can sue or be sued under the firm name. Much like a sole proprietorship, the business is carried on directly by the partners and a partnership does not form a separate legal entity. However, for certain purposes, a partnership is treated as a unit. All property contributed by the partners, or purchased by a partnership, becomes partnership property. All partners in a partnership are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses, unless otherwise agreed by the partners. Each of the British Columbia Partnership Act, the Partnership Act (Alberta), the Ontario Partnerships Act and the Civil Code of Québec, permits partners to vary a set of statutorily prescribed mutual rights and duties, such as the sharing of profits and losses, by express or implied agreement. Each Act also provides a framework to govern the relationship of partners and third parties (which may not be varied by agreement).

In a general partnership, each partner is jointly liable with the other partners to the full extent of the partner’s personal assets. The estate of a deceased partner remains liable for partnership debts incurred when the partner was alive. However, a partner can be discharged from a partnership by an agreement and will not thereafter be responsible for debts incurred after the signing of such an agreement. General partnerships created under the laws of Quebec or carrying on business in Quebec are bound in law to file a declaration of registration in the prescribed form with the Registraire des entreprises.

  1. Limited partnerships

In British Columbia, Alberta and Ontario, a limited partnership is created by complying with the relevant provisions of the applicable partnership legislation, and is governed by that legislation and general partnership law. In Quebec, a limited partnership is created by complying with the relevant provisions of the Civil Code of Québec. The limited partnership must consist of one or more general partners, and one or more limited partners. One person can be both a general and a limited partner. A “person” includes an individual, a sole proprietor, a partnership and a corporation.

A limited partner is much like a passive investor in a corporation, sharing the profits of the limited partnership in proportion to the contribution made by the partner. This form of partnership is used primarily for public financing where passive investors are involved, and it is desirable for profits and losses to flow through to the investors. It is also used by investors that are non-taxable entities, such as government-related agencies (e.g. some public utilities or provincial development agencies), where the investor wishes to avoid holding its investment in a company that is required to pay taxes before distributing its income to its shareholders.

In Ontario, a limited partner may give advice to the partnership, or act as an agent or employee of the limited partnership. However, in each of British Columbia, Alberta, Ontario and Quebec, if the limited partner takes part in the control or management of the business, then the partner will no longer be considered a limited partner and will be subject to the unlimited liability of a general partner.

Generally, the interest of a limited partner is assignable if all the partners consent to the assignment or if the partnership agreement permits it.

General partners in a limited partnership have the same rights and obligations as in general partnerships, except that certain actions of the general partner may require the prior consent of the limited partners. It is common to have a corporation as the general partner because of the limited liability feature of the corporation.

In British Columbia, Alberta and Ontario, a limited partnership is only legally created when a declaration or certificate in prescribed form, signed by all of the general partners (and in Alberta, all of the limited partners), is filed with the relevant registrar. In Quebec, the partnership is created upon the formation of the contract, if no other date is indicated in the contract, and the partnership must file a declaration in prescribed form with the Registraire des entreprises. In British Columbia, the certificate includes the name of the partnership, the nature of the business of the limited partnership, the term for which it is to exist, the full name and address of each general partner, the aggregate amount of cash and property contributed and agreed to be contributed by all of the limited partners, and the basis on which limited partners are to be entitled to share profits or receive other compensation. In Alberta, the certificate states the following: the firm name, the character of the business, the name and address of each partner (and whether they are a general or limited partner), the term for which the partnership is to exist and certain other details of the structure of the partnership. In Ontario, the declaration states the name of the limited partnership, the name and address of each general partner and the general nature of the business of the limited partnership. In Quebec, the declaration states, among other things, the object of the partnership, the name and domicile of each of the known partners at the time the contract is entered into, the place where the register containing up-to-date information on the name and domicile of each limited partner, and all information relating to the contributions of the partners to the common stock, may be consulted. The declaration also distinguishes between general and limited partners.

Joint ventures

A joint venture is not a specific type of business organization but rather, it is more aptly described as an association of two or more individuals, corporations or partnerships, or some combination of these, for the purpose of carrying on a single undertaking or a specific business venture. A joint venture may take the form of a partnership, a limited partnership, a co-ownership of property or a corporation. Generally, the parties to a joint venture will enter into a written agreement (whether a partnership agreement, a limited partnership agreement, a co-ownership agreement or a shareholders’ agreement) which establishes the respective rights and obligations of the parties in respect of the venture.

Canadian distributors and selling agents

A foreign organization can enter into contracts to supply goods or services to Canadians without being considered to be carrying on business in Canada. The distinction is sometimes referred to as “doing business with Canada,” as opposed to “doing business in Canada”. This can also extend to a long-term distributorship arrangement under which a Canadian individual or corporation markets the products of a foreign business in Canada, either on an exclusive or non-exclusive basis. In this way, a foreign business can have an independent sales representative organization in Canada without being liable to Canadian income tax on its profits from such sales. For more information concerning the income tax consequences of such activity, see the discussion below in the section entitled “Income tax considerations”.

Franchising, as a method of business expansion and organization, represents one of the most dynamic commercial sectors in Canada. In a typical franchise relationship, the franchisor frants the right to the franchisee to sell products and services under the franchisor’s trade-mark using the franchisor’s prescribed business format. In return, the franchisee agrees to comply with the standards of the franchise system, and typically, to pay an up-front fee and continuing royalties. Franchise arrangements can take many different forms, from master franchise relationships, area developers, multi-unit franchising and joint-ventures to single unit franchise agreements for individual locations.

The importance of franchising to the Canadian economy should not be underestimated. Not only does Canada offer a powerful economic environment, but the legal framework for franchising is encouraging. Currently, only five of the Canadian provinces have enacted franchise legislation, namely Alberta, Ontario, Manitoba, New Brunswick and Prince Edward Island (PEI). Franchisors wishing to establish  themselves in those provinces must therefore comply with such legislation which involves notably strict disclosure requirements. There is currently no specific disclosure legislation dealing with franchising although the British Columbia Law Reform Commission has recommended that franchise legislation be implemented in that province and legislation is expected there eventually. Furthermore, many industry sectors prevalent in franchising are subject to regulation by both federal and provincial laws of general application. Finally, franchisors that are members of the Canadian Franchise Association are encouraged to comply with the minimum disclosure obligations of that organization

Franchise disclosure, registration and regulation

As highlighted above, Alberta, Ontario, Manitoba, New Brunswick and PEI are the only provinces with legislation in effect that specifically governs certain aspects of franchising.

The disclosure document must contain information which includes the business of the franchisor, information regarding the start-up costs of a typical franchised establishment, information regarding the termination of franchised establishments, the financial statements of the franchisor and copies of the form franchise agreement or any other ancillary agreements to be signed, as well as all material facts. Generally, franchisors are permitted to use disclosure documents in all legislated jurisdictions provided that these disclosure documents include, by way of an addendum or “wrap around” document, any information necessary to meet the requirements of a disclosure document under the Acts in each such jurisdiction. The Ontario Act does not specifically provide for an addendum or “wrap around” document. As a result, a disclosure document is often prepared for Ontario in accordance with the Ontario Act, and then a “wrap around” is prepared to meet requirements in other provinces.

Financial statements prepared in accordance with generally accepted accounting principles must normally be included within the disclosure document. The minimum standards of review under the Acts are those of review engagement standard. Certain franchisors are exempt from the requirement to include financial statements in their disclosure documents. The disclosure document must also include a certificate certifying that the disclosure document contains no misrepresentation.

The Acts impose on the parties to a franchise agreement a duty of fair dealing in the performance and enforcement of that agreement. They also provide the franchisee a private right of action for damages against the franchisor, and every person who signed the disclosure document if the franchisee suffers a loss because of a misrepresentation contained in the disclosure document. As well, if the franchisee did not receive the franchise disclosure document within the time limits set out in the appropriate Act, the franchisee has the right to rescind the franchise agreement.

Quebec

Franchising in Quebec is different than in the other provinces, in that the law is governed by the Civil Code of Québec. One interesting feature of the Civil Code of Québec is the concept of contracts of adhesion, where the essential provisions are imposed by one of the contracting parties and are not negotiable. The consequences of a contract being qualified as a contract of adhesion are that if one of its provisions is incomprehensible, unreadable or abusive, that provision may be nullified or modified by a court. The same principle applies to “external” clauses (i.e. clauses that are not contained in the contract but to which the contract refers such as provisions contained in operations manuals or other documents). The courts of Quebec have often characterized a franchise agreement as an adhesion contract, when it has been shown that its essential provisions could not be negotiated.

Franchise businesses intending to operate in Quebec must also comply with French language laws and, in particular, the Charter of the French Language. Franchisors should realize that they will be expected to carry on business in French, especially outside Montreal, and have all of their materials (operations manuals and other documentation for use by employees) translated into French, although the franchise agreement itself need not be translated provided it specifically stipulates that the parties have agreed that it be drawn up in English. For more information on some of these topics, please refer to the corresponding sections in this publication.

Other areas of law affecting franchising arrangements

In addition to complying with the specific franchise legislation, businesses expanding into Canada by way of franchising will also want to ensure that they comply with other laws of general application affecting franchising arrangements. These include ensuring that their trade-marks are protected under Canadian trade-mark legislation, that their products and practices comply with applicable product labelling (e.g. for food and drugs) and consumer protection legislation, and that their arrangements comply with Canadian competition laws (which deal with matters such as exclusive dealing, market restriction and tied-selling) and applicable tax requirements.