TARIFF TURMOIL: U.S. tariffs and Canadian counter tariffs will have an impact on the franchise industry
Author’s Note: Since this article was first published in March 2025, the tariff landscape has continued to shift. We have updated the article accordingly, including to reflect some of the lessons learned during the first eighteen months of the dispute.
Since the opening salvo in the U.S.-Canada trade dispute in early 2025, the measures initially imposed on Canadian goods have been modified by exemptions for CUSMA-compliant goods and supplemented by sector-specific tariffs, including on steel, aluminum and automobiles. In February 2026, the U.S. Supreme Court held that the International Emergency Economic Powers Act did not authorize the broad tariffs imposed under that statute. That decision did not, however, bring the trade dispute to an end, as the U.S. has continued to rely on other statutory authorities to impose tariffs on certain Canadian goods.
Canada’s response has evolved as well. After imposing counter-tariffs beginning in March 2025, Canada removed most of those initial countermeasures effective September 1, 2025, while retaining measures affecting steel, aluminum and automobiles. The dispute has remained fluid, with further U.S. measures and Canadian countermeasures announced as recently as August 2026. The takeaway for businesses is that the tariff rates and products affected at any particular point in time should not be assumed to remain static.
The continuing use of U.S. tariffs and Canadian counter-tariffs has had widespread effects across various industries, including the franchise sector. Franchisors and franchisees must continue to prepare for the legal and business consequences of rising costs, disrupted supply chains and shifting market dynamics. The experience since March 2025 has also shown that tariff planning needs to account for changing rates, exemptions, product coverage and legal authorities.
SUPPLY-CHAIN ANALYSIS
Franchisees that depend on imported goods — whether for equipment, supplies, or inventory — may face substantial cost increases due to tariffs. For instance, tariffs on raw materials, such as steel and aluminum, as well as finished products, will likely drive up operational expenses and delay deliveries, potentially disrupting the system’s supply chain. This will impose increased costs on franchisees, which will necessitate a difficult decision between absorbing such costs, passing them on to customers, or a combination of both. Many franchise agreements also require the use of specific materials and equipment to maintain consistency throughout the system, which may limit (absent franchisor intervention) the ability of franchisees to easily adapt to changing economic circumstances.
Maintaining a strong franchisor-franchisee relationship is key in navigating these changing market conditions. Below are certain key considerations for franchisors in navigating this relationship:
Initial investment: Franchisors must consider whether they should make changes to their initial investment expectations and requirements for franchisees. If tariffs increase the cost of equipment, supplies, or inventory, franchisors should consider reviewing and revising the initial investment estimates to reflect these higher costs. Failure to do so may mislead potential franchisees about their expected expenses. Moreover, failing to account for such changes may be setting franchisees up for failure before they even begin operating.
Ongoing expenses and unit economics: Franchisors should evaluate how tariff-induced cost increases affect their unit economics, including per-location profitability, break-even points, and overall financial sustainability. Clearly presenting this data can help franchisees make informed investment decisions. If tariffs impact ongoing costs, such as supply procurement or vendor agreements, these changes should be disclosed. Franchisees should be made aware of potential cost fluctuations. Franchisors should assess franchisee costs on a market-by-market basis, and prepare to be flexible on procurement where necessary to ensure that franchisees’ unit level economics remain viable in light of this volatility.
Supply chain and sourcing restrictions: If a franchise system mandates specific suppliers affected by tariffs, these restrictions should be transparently disclosed. Franchisors may also explore whether allowing some flexibility in supplier selection can help mitigate disputes, and actively work with franchisees to assess whether domestic alternatives exist that will (while perhaps not entirely consistent with brand standards applicable in the U.S.) allow the franchisee to continue operating without further hardship than is necessary.
Financial performance representations: Franchisors should monitor profit margins and other financial metrics due to tariff-related cost increases and assess whether tariff-related cost increases are a development that impacts financial performance representations. Providing outdated or overly optimistic projections could expose franchisors to legal claims and otherwise adversely impact the franchisor-franchisee relationship.
CONSUMER PRICE SENSITIVITY
Franchisors should also consider whether to authorize or encourage price increases for goods and services. However, price-sensitive consumers may reduce their spending or seek alternatives, particularly in highly competitive industries such as quick-service restaurants, retail, and hospitality. It is critical that franchisors consider balancing necessary price adjustments with consumer expectations in order to maintain brand reputation and profitability. In light of these challenges, franchisors should consider which obligations currently imposed on franchisees are crucial to maintaining brand standards, and which others may be more flexible.
ADAPTION IS KEY
Predictable costs and strong unit economics are the hallmarks of a successful franchise system. While tariffs may create new cost pressures, they also present opportunities for Canadian brands to emphasize domestic production and sourcing, which can resonate with consumers and differentiate them in the market. Similarly, U.S. brands entering Canada may still find opportunities to expand, particularly when the favourable exchange rate helps offset tariff impacts, allowing cost-competitive pricing in the Canadian market. Franchisors and businesses that adapt their supply chains, pricing strategies, and brand positioning to these evolving dynamics can still find opportunities for growth and expansion despite the shifting trade landscape.
OPPORTUNITIES & SHIFTS
While tariffs impose significant challenges for businesses of all stripes, they also provide opportunities to savvy and opportunistic businesses. For example, Canadian franchise systems with predominantly domestic supply chains may reap the benefits of changing consumer preferences towards Canadian-made products, while products previously bound for the U.S. may be sold domestically at the same or lower prices. Franchisors can also re-evaluate global sourcing strategies to mitigate tariff exposure.
To address ongoing challenges, franchisors should consider the following actions:
- Supply-chain diversification: The impending tariffs should prompt franchisors to carefully re-evaluate suppliers and explore domestic alternatives where feasible.
- Negotiating terms: Franchisors and franchisees should also work with suppliers to share or reduce tariff-related cost burdens.
- Efficiency measures: Franchisors and franchisees should invest in technology or streamline operations to offset increased expenses.
- Franchise disclosure and agreement revisions: It is critical that franchisors assess whether franchise disclosure documents and franchise agreements need adjustments to address unforeseen consequences arising from the tariffs.
MADE IN CANADA
While not the primary focus of this article, businesses should keep in mind that promoting products as “Made in Canada” or “Product of Canada,” or highlighting Canadian ownership, can be a valuable strategy for brands seeking to reduce the impact of tariffs between Canada and the U.S. However, businesses must ensure that such claims comply with Canadian law, including the Competition Act, the Consumer Packaging and Labelling Act, and the Textile Labelling Act. These acts prohibit false or misleading representations, and restrict how and when such claims can be used. Businesses that choose to make “Made in Canada” or “Product of Canada” claims must ensure their claims meet the appropriate guidelines and thresholds.
LESSONS LEARNED IN THE FIRST EIGHTEEN MONTHS OF THE DISPUTE
The first eighteen months of the dispute have reinforced that managing tariff risk involves more than deciding whether to absorb an additional cost or pass it along. Tariffs have been introduced, modified, exempted and challenged, sometimes in relatively short order. For franchise systems, a few practical lessons have emerged:
Build flexibility into the supply chain: Domestic sourcing can help reduce exposure, but flexibility may be even more important. Having alternative approved suppliers, products or specifications can give a franchise system more room to respond when tariffs change. It is also important to understand where key inputs actually originate and how they are classified for tariff purposes. Buying from a Canadian supplier, for example, does not necessarily mean that the underlying goods are of Canadian-origin or insulated from tariffs.
Understand who bears the tariff risk: Supplier, distribution and franchise arrangements should make clear who ultimately bears tariff-related cost increases. Just as importantly, the parties should understand what happens if a tariff is later reduced, removed or refunded. The successful legal challenges to certain U.S. tariffs have shown that tariff costs may not always be permanent. This makes provisions dealing with tariff pass-throughs, refunds, rebates and changes in law worth another look.
Disclose volatility rather than try to predict it: The pace of change over the past eighteen months has also demonstrated how difficult it is to predict where tariffs will be months—or even weeks—into the future. Rather than trying to forecast a particular outcome, franchisors should ensure that their disclosure appropriately addresses material exposure to tariffs and other trade measures, particularly where those risks could affect initial investment estimates or financial information.
Look for available relief: Tariffs do not always have to be treated simply as an unavoidable cost of doing business. Government remission, financing and other tariff-relief programs may be available in appropriate circumstances. Where a franchise system has centralized purchasing arrangements, it is worth considering whether the franchisor, supplier, distributor or franchisee is best positioned to pursue that relief before the additional cost is passed through the system.
Plan for more than one outcome: Perhaps the clearest lesson is that tariff planning should not depend on a single prediction about the future of Canada-U.S. trade. Measures have been imposed, modified, exempted, challenged and replaced over a relatively short period. Franchise systems will be better positioned if they test their supply chains and unit economics against a range of tariff, sourcing and pricing scenarios and leave themselves enough flexibility to respond when circumstances change.
How Sotos Can Help
Tariffs can affect much more than the cost of imported goods. For franchise systems, they can also create issues around supplier arrangements, pricing, franchise disclosure, franchise agreements and the allocation of increased costs between the parties.
Sotos LLP advises franchisors and other businesses on the legal and commercial issues that can arise when market conditions change. Our work can include reviewing franchise agreements and disclosure documents, assessing supplier and distribution arrangements, reviewing how tariff-related costs are allocated, and advising on sourcing and pricing issues.
We can also assist businesses with advertising and marketing issues, including the use of “Made in Canada” and “Product of Canada” claims.
If tariffs or other trade measures are affecting your franchise system or commercial arrangements, please contact Jason Brisebois at 416.572.7323 or jbrisebois@sotos.ca, Peter Viitre at 416.977.7754 or pviitre@sotos.ca, or Nicole Perez at 416.977.3674 or nperez@sotos.ca.
About the Authors
Jason Brisebois is a partner at Sotos LLP whose practice includes franchise law, mergers and acquisitions, commercial leasing, privacy and data protection, and advertising and marketing law. He also advises clients on commercial agreements and Canada-U.S. cross-border business matters.
Peter Viitre is a partner at Sotos LLP whose practice focuses on franchise law. He advises franchise systems on franchise agreements, disclosure obligations and other legal and commercial issues affecting their businesses.
Nicole Perez is an associate at Sotos LLP who advises clients on franchise and commercial matters, including legal issues affecting franchisors and businesses operating within franchise systems.