Vehicle Sales in Canada: How Foreign OEMs can structure a compliant and efficient Dealer Network

By Jason Brisebois, John Yiokaris, and Peter Viitre

Canada is an attractive but highly regulated market for foreign vehicle original equipment manufacturers (“OEMs”). Canada has a safe and stable economy and adheres to the rule of law, making it an attractive destination for OEMs looking to introduce their products into new foreign markets. While the Canadian marketplace often appears similar to the United States at first glance, dealer regulation, franchise protections, different legal systems, tariffs, environmental law requirements, data privacy laws, consumer protection laws, and countless other regimes create a very distinct legal and commercial environment. Careful dealer network structuring at the outset is critical to avoiding regulatory friction, dealer disputes, and costly restructuring later.

This article outlines certain principal considerations non-Canadian OEMs should review when expanding into the Canadian marketplace and designing a Canadian dealer network.

1. Choosing the Right Market Entry Structure

Many OEMs enter Canada by establishing a wholly-owned Canadian subsidiary entity, which contracts directly with dealers and manages national distribution, marketing, and compliance. This structure offers simplicity regarding certain tax, employment, regulatory, and other matters, while also providing liability containment.

Alternative models, such as appointing an independent importer and distributor, may offer speed to market, but may also result in reduced brand control and imaging and increased difficulty transitioning to a direct manufacturer-dealer relationship later. Once dealers are entrenched under a third-party distributor, re-alignment can be highly contentious and expensive.

Regardless of the model an OEM ultimately adopts, early cross-border tax planning is essential. Canada’s corporate tax, sales taxes, transfer pricing, and withholding tax regimes, among other considerations, can materially affect OEM and dealer economics, pricing, and overall profitability if not considered and addressed upfront. Misalignment between legal structure and tax planning can result in compliance exposure and costly retroactive restructuring.

2. Dealer Network Architecture and Coverage Strategy

Canada’s geography, population distribution, and climate materially affect the planning and breadth of any proposed dealer network. While Canada is geographically vast, its population is highly concentrated in a small number of urban corridors, namely southern Ontario, Québec’s St. Lawrence corridor, and pockets of British Columbia and Alberta. This leaves a number of regions with low population density and long travel distances between service points. This uneven distribution complicates dealer placement, service coverage, and vehicle and parts logistics.  Moreover, with the country’s latest emphasis on increased immigration, the country’s population has grown significantly over the last five years.

In the seven provinces in Canada that have (or will soon have) franchise disclosure and relationship laws, including Ontario, British Columbia, and Alberta, OEMs should be aware that automotive dealerships generally constitute “franchises” under such laws (regardless of how the contract attempts to define each party and their relationship). As a result, a franchise relationship will often exist between the OEM and each dealer, even if one is not intended, imposing additional franchise disclosure and relationship obligations on the OEM.  Failing to recognize and comply with these obligations will have significant monetary and reputational impacts on OEMs, and may serve to severely impact an OEM’s entry into the Canadian marketplace.

Moreover, certain OEMs have been moving away from the traditional franchisee dealer model to an agency or direct-to-consumer (D2C) model, where dealers are no longer directly responsible for owning and selling each vehicle, but instead fill certain other primary functions, such as vehicle delivery, test drive and customer touchpoints, service, and used vehicles sales. The reasons for this transition include OEMs making an effort to establish stronger ties with purchasers and reducing floor plan requirements for its dealers, all the while capturing a greater share of the profits to be made from selling new vehicles.

For this and other reasons, and together with the increasing prevalence of direct to consumer and/or hybrid agency models for vehicle sales, certain key considerations for any dealer network include:

• Whether to adopt a traditional franchise dealer model, an agency (D2C) model, or a hybrid between the two models, and whether to apply the chosen model(s) to all of the OEM’s vehicle lines or only to a select line(s).
• How to ensure adequate national and regional coverage, including rural and remote markets, if such markets are to be included in a proposed network.
• Whether dealers may operate single-brand or multi-brand rooftops, including whether existing dealers of other OEMs would be considered to further adopt a new entry OEM.

Manufacturers should expect scrutiny from dealers around network density, point allocation and closures, the opening of additional locations—particularly in growing urban markets, and facility requirements. Dealers currently operating dealerships of other OEMs may also face restrictions in their ability to take on new OEM banners.

3. Dealer Agreement Design and Termination Risk

Dealer agreements in Canada must balance brand control with enforceability and commercial realities. As dealer relationships may last for years, or even decades, such agreements need to be thorough, well-drafted, and as forward looking as possible. Moreover, dealer agreements must provide dealers with a reasonable opportunity to recoup their investment in the dealership. As discussed above, dealer agreements typically constitute “franchise agreements” under applicable franchise disclosure and relationship laws.

Critical drafting considerations include, but are not limited to:

• Term length, renewal rights (if any), and clearly defined performance criteria;
• Facility, branding, staffing, training, and equipment standards;
• Floorplan requirements;
• Sales performance and operational criteria;
• Export restrictions (to avoid grey-marketing);
• Ownership, assignment, and change of control provisions;
• Termination rights and notice periods; and
• Many other legal and business considerations.

4. Provincial and Federal Legal and Regulatory Considerations

Canada’s federal system has a material and often underestimated impact on foreign OEMs and other businesses expanding into the Canadian marketplace. Legislative authority is divided between the federal government and Canada’s ten provinces and three territories, resulting in multiple overlapping regimes across varying laws, regulations, and industries. While matters such as competition law, customs, and certain safety standards are in the federal domain, provinces regulate (among other things) dealer licensing, consumer protection, franchise and disclosure laws, employment standards, and aspects of sales tax and environmental compliance.

With respect specifically to dealer regulations and licensing (such as Ontario’s OMVIC framework), such matters are provincial in nature. As a result, OEMs may need to juggle and maintain compliance with multiple provincial frameworks at any given time. OEMs should also be mindful of laws and regulations, whether at the federal or provincial level, of:

• Advertising and marketing laws, including signage.
• Franchise disclosure laws.
• Competition laws.
• Consumer protection laws.
• Language laws, including in the province of Quebec.
• Environmental laws and mandated emission standards.

Successful expansion into or further into Canada therefore requires a coordinated national strategy that is deliberately adapted to provincial realities, rather than a one-size-fits-all approach.

5. Data, Digital Retail, and Customer Ownership

Data is becoming an ever-important tool and asset for businesses of all types, including OEMs. The nature of the products and services sold by OEMs and their dealers allows manufacturers to be especially-well positioned to capitalize on the ability to collect and employ significant data, including data about its customers.

That being said, OEMs should be acutely aware of the large number of rules and regulations governing data collection, use, disclosure, storage, and destruction in Canada. At the federal level, the Personal Information Protection and Electronic Documents Act (PIPEDA) governs the collection, use, disclosure, storage, and destruction of personal information in commercial activities, while several provinces have enacted enhanced private-sector privacy regimes that impose even stricter requirements.

For OEMs, these laws directly affect digital retail platforms, dealer CRM systems, marketing programs, connected-vehicle and telematics data, and cross-border data transfers. PIPEDA and other legislation places significant emphasis on meaningful consent, purpose limitation, and accountability across the entire data lifecycle. As a result, OEMs expanding into Canada must carefully align their data architecture, dealer agreements, and customer engagement strategies to ensure compliance across multiple jurisdictions’ laws, rules, and regulations – even when all interaction is between the customer and the dealer.

6. Dispute Resolution

To mitigate litigation risk with dealers, OEMs should carefully consider the provisions of their dealer agreements, with mechanisms existing to manage disagreements or issues before and after they escalate into formal conflicts and litigation. This can be achieved through provisions such as:

• Dealer advisory councils created and maintained by the OEM;
• Escalation and remediation frameworks; and
• Tiered dispute resolution clauses (such as mediation and arbitration).

In parallel, most OEMs selling vehicles in Canada participate in the National Automobile Dealer Arbitration Program (often referred to as NADAP), an industry-funded mediation and arbitration program that provides binding dispute resolution for disputes between OEMs and their dealers. Although NADAP is not mandatory for OEMs, most OEMs operating in Canada have adopted it as it provides a more efficient and confidential process than dealing with disputes through the courts, and by having disputes mediated and arbitrated by individuals with specific automotive knowledge and experience.  Foreign OEMs should carefully assess whether their vehicles, distribution model, and market entry plans necessitate participation in NADAP and ensure that their agreements and internal escalation processes are aligned accordingly.

Finally, since Canadian provincial franchise legislation expressly permits franchisees to associate amongst themselves, it should be noted that dealer associations are quite common in Canada and may, depending on the situation, either simplify or complicate the dispute resolution process.

Conclusion

Canada is a stable, sophisticated, and attractive market with significant automotive history and expertise for OEMs, but it is not a “plug-and-play” extension of other jurisdictions. Manufacturers that invest early in thoughtful dealer network structuring, compliance, and balanced dealer economics are far better positioned for sustainable growth and brand stability.

Being informed of all of the various issues impacting OEMs and making sound business decisions will be essential for an OEM to successfully expand into Canada.  This includes carefully considering the operational, contractual, and legal elements of a proposed expansion into Canada.  If you have any questions about expanding into Canada, Sotos LLP can help. Sotos LLP has extensive automotive experience in advising new and established OEMs in all facets of their business.

Please contact Jason Brisebois at 416.572.7323 or jbrisebois@sotos.ca , John Yiokaris at 416.977.3998 or jyiokaris@sotos.ca, or Peter Viitre at 416.977.7754 or pviitre@sotos.ca,  to discuss your automotive industry related inquiries.

About the Authors

Jason Brisebois, Sotos LLP

Jason Brisebois is a partner at Sotos LLP. His practice focuses on corporate, commercial, and franchise law, with a particular emphasis on the automotive sector.

Jason was awarded the Lexology 2024 Client Choice Award, is listed as “Ones to Watch” in Best Lawyers in Canada, and is recognised as “Recommended” in Lexology Index: Canada. He has also been named a “Legal Eagle” by Franchise Times Magazine.

John Yiokaris, Sotos LLP

John Yiokaris is a partner at Sotos LLP and serves as co-managing partner of the firm. He has extensive experience acting as lead counsel for major automotive manufacturers and dealers. John is also head of the firm’s Trademark practice and advises on intellectual property matters, including the registration and licensing of trademarks.

John was awarded the Lexology 2019 Client Choice Award, is ranked by Chambers Canada, and has been consistently listed in Best Lawyers in Canada. He is also recognised in the Best Lawyers Global Business Edition, listed in the Canadian Legal LEXPERT Directory, and recognised in Lexology Index: Canada. John was inducted into the Franchise Times “Hall of Fame” in 2022.

Peter Viitre, Sotos LLP

Peter Viitre is a partner at Sotos LLP and head of the Corporate and Commercial practice. He regularly advises domestic and international clients, including in the automotive sector, on market entry, dealer and franchise network structuring, regulatory compliance, and risk management across Canada.

Peter is ranked in Band 1 by Chambers Canada, has been consistently listed in Best Lawyers in Canada, and has been named “Lawyer of the Year” by Best Lawyers in Canada in 2015 and 2018. He is also recognised in the Best Lawyers Global Business Edition, listed as “Most Frequently Recommended” in the Canadian Legal LEXPERT Directory, and recognised as “Recommended” in Lexology Index: Canada. Peter has further been recognised as “Most Highly Regarded” and as a “Global Elite Thought Leader” by Lexology Index, and was inducted into the Franchise Times “Hall of Fame” in 2022.