When it comes to protecting intellectual property in franchising, trademarks tend to dominate the conversation, largely because the franchise system’s name and logo are often the key drivers of brand recognition and success. However, one of the assets in franchised businesses that is often overlooked are copyrighted materials.

What does copyright protect?

In Canada, copyright arises automatically, without formal registration, upon the creation of an original work in a tangible form. Copyright protects the expression, but not the underlying idea. Under Section 3(1) of the Copyright Act, R.S.C., 1985, c. C-42 (the “Act”), copyright grants the owner the exclusive rights to produce, reproduce, publish, perform, communicate, or adapt an original work.[1] This includes the right to authorize others, for example franchisees, to use the work or  material under certain conditions.

Works that are protected by copyright include:

• Literary works (e.g. computer programs, compilation of literary works);
• Dramatic works (e.g. choreographic work, mime, scenic arrangement, cinematographic work, compilation of dramatic works);
• Musical works (e.g. music or musical composition with or without words, compilation of musical works); and
• Artistic works (e.g. paintings, drawings, maps, charts, plans, photographs, sculptures, works of artistic craftsmanship, architectural works, compilation of artistic works).[2]

While copyright arises automatically, there are benefits to registering copyright with the Canadian Intellectual Property Office (“CIPO”). Once the application is submitted and the application fee is paid, a registration certificate and registration number will be issued to the applicant within seven business days.[3] The certificate is deemed presumptive evidence that the registered owner owns the copyright.  It can be beneficial in litigation proceedings and in warranting ownership of the copyright to prospective licensees of a work.

How does copyright apply in the context of franchising?

Although registration is not required, registering copyright can be useful in the franchising context. One of the basic premises of the franchise model is that, in return for ongoing payments, the franchisee receives the right to use some of the franchisor’s intellectual property, subject to certain conditions. This includes everything from training manuals, advertising and promotional materials, website content, proprietary software, computer software, menus, newsletters to employees or customers, and operations manuals.[4] Obtaining a copyright registration for these materials helps to ensure that there is no unauthorized use of the materials including by terminated franchisees.  It also allows the franchisor to enforce its rights more effectively and to ensure that it has the exclusive right to commercially benefit from the use of the materials.

Canadian franchise law does not specifically regulate copyright. However, the disclosure requirements under the provincial franchise legislation can be interpreted as requiring franchisors to describe all intellectual property licensed to the franchisee.[5] Franchisors should ensure that their franchise disclosure document clearly articulates who owns the copyright. For example, if a third party contractor has been hired to create the materials (such as the training materials, software, or brochures), the contractor, as the author, owns the copyright and not the franchisor. To avoid any future disputes, the franchisor should ensure that it obtains a fully executed assignment of the ownership of the materials or an exclusive licence to use the materials.[6]

What is the importance and benefit of copyright protection for franchisors?

There are compelling reasons for franchisors to register a copyright in their materials. Copyright registration serves as strong evidence of ownership and ultimately provides a creation date, which is invaluable in the event of a future dispute. It also strengthens enforcement efforts, making it easier for franchisors to stop the unauthorized use of the materials and to pursue infringement claims more effectively. This helps to prevent any misuse of the brand’s materials and intellectual property which could damage the brand’s reputation or result in a financial loss. Additionally, it is important to include clear copyright provisions in franchise agreements by defining ownership and the permitted uses allowed by the franchisee. This can help to lower the risk of disputes or litigation arising from the improper or unauthorised use of materials.

Beyond the legal and financial advantages, effective copyright registration and protection supports the foundation of a successful franchise – brand consistency. Franchisors require that all of their locations are uniform in appearance and presentation so that customers receive the same experience, regardless of where they interact with the brand. One of the primary ways to achieve this uniformity and consistency is by franchisors allowing franchisees to use their intellectual property, and specifically the franchisor’s copyrighted material. The distribution of proprietary characters, music, logos, marketing materials, training materials, digital content, uniforms, menus, and even store layouts contributes to maintaining that uniformity. Protecting these assets not only maintains specific quality and standards but also fosters customer trust and loyalty, which helps to reinforce brand reputation and contributes directly to the franchise system’s growth.

Copyright protection can provide franchisors with a competitive advantage and provide an additional revenue stream through licensing the proprietary materials in certain circumstances. A well-protected copyright portfolio can enhance the marketability of the franchise system itself, making it more attractive to prospective franchisees, investors, and partners, all of whom value a well-protected and unique brand. Safeguarding copyright is not just about compliance, but is essential for protecting reputation, deterring infringement, and securing long-term success.

Conclusion

For Canadian franchisors, effective copyright management is essential to protecting some of the core elements of its franchise system. These are assets of their business that require protection, and copyright should therefore be part of the discussion when establishing their franchise system and drafting their franchise agreement and disclosure documents.

At Sotos LLP, our intellectual property team provides full-service, practical support across all aspects of IP protection. We can assist not only with registering your copyright, but also with developing and implementing copyright and trade mark strategies, conducting IP audits, preparing and negotiating licensing and data-sharing arrangements, and enforcing your rights through opposition, infringement, counterfeit, and other litigation proceedings, so that your brand and proprietary materials are properly protected as your franchise system grows.

About the authors

Anna Thompson-Amadei is an associate at Sotos LLP whose practice includes advising clients on trademark and other intellectual property protection, aligning practical brand protection strategies with the growth and day to day needs of their business.

Bailee Kleinhandler is an associate at Sotos LLP in the corporate and commercial group and is building a diverse practice in corporate and franchise law.

[1] Copyright Act, RSC, 1985, c C-43 at s 3(1).

[2] Ibid at s 2 and 5(1).

[3] Government of Canada, Canadian Intellectual Property Office, How your application for registration of a copyright is processed (August 7, 2022). https://ised-isde.canada.ca/site/canadian-intellectual-property-office/en/copyright/how-your-application-registration-copyright-processed.

[4] Valerie Brennan, “Copyright Protetion for the Franchised Business” (2024) 43:4 Franchise L.J. at 32.

[5] Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, c 3 at s 5(4).

[6] Copyright Act, RSC, 1985, c C-43 at s 13(4).

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The Province of Saskatchewan may soon become the seventh province in Canada to enact franchise disclosure and relationship legislation. The Legislative Assembly of Saskatchewan introduced Bill 149, The Franchise Disclosure Act (the “Act”), for first reading on November 9, 2023.  If the legislature passes the bill, it will be the province’s first comprehensive franchise legislation, and represent a significant step towards uniformity in franchise laws across Canada, as Saskatchewan would join British Columbia, Alberta, Manitoba, Ontario, New Brunswick, and Prince Edward Island in having legislated protections in place for franchisees.

The Act was introduced after public consultation on the need for franchise legislation within the province. The framework of the consultation was based on the Uniform Law Conference of Canada’s Uniform Franchise Act (which Sotos LLP co-chaired). In response, the Canadian Franchise Association and Sotos LLP, among other parties, submitted a number of recommendations, including urging the province to follow the most recently enacted provincial franchise legislation, British Columbia’s Franchises Act, which came into force in 2017.

Having undergone its first and second readings in November 2023, the Act is anticipated to be enacted in 2024. Absent franchise disclosure and relationship legislation having been previously adopted in the province, franchise (and related) agreements are primarily subject to the common law of contracts, in addition to standard consumer protection regulations and rules that may apply.

If enacted, the Act will constitute a major change to the Saskatchewan franchise industry and its dealings, as it will place significant new disclosure obligations on franchisors, and offer new statutory remedies to franchisees that operate in the province.

Contents of the Act

The main features of the proposed Act include, but are not limited to, the following:

1. Duty of Fair Dealing. Every franchise agreement will impose on each party a duty of fair dealing in the performance and enforcement of the franchise agreement. Further, each party will have a right of action for damages should the other party breach the duty of fair dealing.  The duty of fair dealing includes the duty to act in good faith and in accordance with reasonable commercial standards.
2. No waiver of rights under the Act. Franchisees will not be able to waive any rights granted to them under the Act.
3. Franchisee Rights to Associate and Form Associations. Franchisees will be permitted to form or join franchisee organizations and associations.
4. Franchise Disclosure. Franchisors will be required to provide prospective franchisees with a disclosure document (containing certain prescribed information, as well as all material facts). Note that franchisors will need to update their existing disclosure documents to ensure that they can be safely and effectively used in the Province of Saskatchewan, once the legislation is effective. Franchisors should proactively work with legal counsel to ensure that such updates are in place prior to the effective date of the legislation, to ensure that franchise sales are not delayed or affected.
5. Franchisee’s Right of Rescission. A franchisee will have the right to rescind a franchise agreement within 60 days after receiving the disclosure document if the contents of the disclosure document do not meet the requirements of the Act. The bill also provides that a franchisee may rescind the franchise agreement within two years after entering into the franchise agreement if the franchisor fails to provide the disclosure document within those two years.
6. Damages. If a franchisee suffers a loss because of a misrepresentation contained in the disclosure document, the franchisee will have a right of action for damages against the franchisor.

When compared to other existing franchise legislation in Canada, specifically, Ontario’s franchise legislation, the Arthur Wishart Act (Franchise Disclosure) (the “AWA”), there are two notable differences with the Act:

1. The Act provides that a franchisee may rescind the franchise agreement within two years after entering into the franchise agreement if the franchisor fails to provide the disclosure document “within those two years”. The reference to providing a disclosure document “within two years” is not contained in any of the other six existing franchise acts in Canada. This provision seems to suggest that if a disclosure document is not received by a franchisee prior to the execution of a franchise agreement, the franchisor can still meet its disclosure obligations within two years after the franchisee enters into the franchise agreement.

2. One of the criteria to meet the definition of a “franchise” in the AWA is that the franchisor (or franchisor’s associate) has a right to exercise significant control or has a right to provide significant assistance (among other criteria). By contrast, the Act defines “franchise” as circumstances where the franchisor (or franchisor’s associate) exercises significant control over, or provides significant assistance in, the franchisee’s method of operation. As such, the Act requires that the franchisor take actual steps to exert control over the franchisee. Simply having the contractual right to do so does not appear to meet the proposed threshold.

Benefits of the Act

As stated above, should the Province of Saskatchewan proceed to enact franchise legislation, this would align it with the regimes of all western provinces, as well as Ontario, New Brunswick and Prince Edward Island.

In addition to making a positive stride towards uniformity across the provinces, the introduction of franchise legislation would also help protect consumers by allowing them to make informed investment decisions when purchasing a franchised business.

At Sotos LLP, we are committed to guiding franchisors through the evolving franchising landscape. The new Franchise Disclosure Act introduced in Saskatchewan brings substantial changes and new obligations that all involved parties must be aware of. Our team is proficient in both the new legislation and the established franchise laws across Canada. We provide a full range of legal services, including the drafting and reviewing franchise agreements, ensuring compliance with disclosure requirements, and representing clients in franchise-related disputes. Contact us today to align your franchise operations with the latest legal standards and safeguard your business interests in this dynamic sector.

Jason Brisebois, Sotos LLP

Jason Brisebois is a partner in Sotos LLP’s corporate and franchise law groups. He has received multiple legal accolades, including being named in the “Ones to Watch” category by Best Lawyers in Canada. Additionally, he won the Lexology 2024 Client Choice Award for Franchising in Canada and was recognized as a “Legal Eagle” by Franchise Times Magazine. Jason can be reached directly at 416.572.7323 or jbrisebois@sotos.ca.

Anna Thompson-Amadei, Sotos LLP

Anna is an associate with Sotos LLP in Toronto, Canada’s largest franchise law firm. She has been recognized as a “Legal Eagle” by the Franchise Times Magazine. Anna can be reached directly at 416.572.7322 or athompson-amadei@sotos.ca.

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Since the regulatory framework in Ontario places the OCS in the middle of the supply chain, the Program cannot fully circumvent the OCS or be structured as a direct pass-through from LP to Retailer.  However, the Program does allow Retailers and Licensed Producers to develop relationships and interact directly. The Program will also allow some Retailers to carry unique product offerings, as compared to their competitors, and will also allow LPs to provide branded products that feature the Retailer’s brand.  LPs will have to work with the OCS to ensure that any obligations they have to Retailers are met, determine the product quantity needed, and ensure that the proper inventory method is used.

In connection with the introduction of the Program, the Alcohol and Gaming Commission of Ontario (the “AGCO”) has updated its standards regarding the provision of inducements from LPs to Retailers. A guidance document, Inducement Rules for Licensed Cannabis Retailers, was released to clarify the changes to the AGCO’s Registrar’s Standards for Cannabis Retail.[2] The changes detail the continued general rule against material inducements, but also highlight new exceptions to this rule. This article will review these new exceptions including with regard to the practice of “white labelling.”

Rule Against Material Inducements

The Registrar’s Standards for Cannabis Retail (the “Standards”) prohibit Retailers from entering into agreements with LPs and their representatives for items, benefits, payments, or services in exchange for the promotion or increased sale of a particular product by the Retailer or its employees.[3] In other words, LPs are prohibited from approaching Retailers and offering them any incentives to promote that LP’s product over other products sold by the Retailer. An example of this would be a Retailer entering into an agreement with an LP whereby the Retailer agrees to promote and increase sales of that LP’s product in exchange for exclusive product features. The provision of exclusive product features would be considered a material inducement by the AGCO and, as such, would be prohibited.

Other prohibited activities or inducements include: the sale of in-store or online advertising space; the provision of cannabis samples for sensory display purposes; the provision of fixtures or physical assets; the provision of items essential to the operation of the business; sales incentives; cash or rebates; travel or accommodation for education or training; and monetary compensation for education or training.[4]

The Exceptions to the Rule:

While the AGCO’s general rule prohibits the provision of material inducements by LPs to Retailers, a few important exceptions do exist, the most important of those being (1) the allowance of items, benefits, or services of nominal value, and (2) the allowance of “white-labelling”.

• Items, Benefits, or Services of Nominal Value:

Retailers may enter into agreements with LPs or their representatives for items, benefits, or services of nominal value. Nominal value items are defined as those of inconsequential value (unlike the prohibited financial and material inducements). The AGCO has not prescribed a specific monetary value above which an item would not be considered “nominal”.  Instead, the AGCO has advised that it will consider the following factors in determining whether the benefit or item would be considered nominal;

• Would a licensee be likely to change their behaviour toward an LP or the LP’s product after receiving the item, benefit, or service?
• Are the items, benefits, or services valued at an amount that would defray the Retailer’s operational costs?
• How many items, benefits, or services have been provided over what period of time? [5]

Retailers should consider these questions when entering into any type of agreement with an LP to ensure that they are not receiving inducements that might be considered material and would, therefore, be prohibited by the Regulations.

• Items, Benefits, and Services Related to Education or Training:

Retailers may accept items, benefits, or services from LPs that are related to education or training. This may include education or training sessions or materials, meals and refreshments during the education or training, and cannabis product samples directly related to education or training. [6]

• Ownership Interest and Franchise Agreements:

Retailers and LPs are permitted to enter into financing, leasing, and franchise agreements. A copy of any such agreement must be disclosed to and approved by the AGCO.  All agreements must comply with the Cannabis License Act, 2018 (CLA)[7] and the Standards. Note that the AGCO will not provide any commentary or explanation regarding its decision to accept or reject a proposed agreement.  As such, it is important that Retailers familiarize themselves with the Standards.

• Store Brand Cannabis Products (White Labelling)

Agreements between Retailers and LPs for store-branded cannabis products (also known as white labels, private labels, and in-house/house brands) are also permitted (“White Label Agreements”).  White Label Agreements allow Retailers to partner with LPs to develop products that include that Retailer’s specific brand. This involves Retailers entering into contractual agreements with LPs for the manufacture and sale of products that are specifically branded for that retail store.[8]  These types of agreements are subject to the same review process by the AGCO as mentioned above.  Retailers should be aware that any branded products will remain available for any other retailer to purchase on the OCS’ “flow-through catalogue,” provided they are part of the Program.

While these agreements are permitted, the AGCO does place certain constraints on their contents.  Retailers and LPs should be cognizant of these rules before entering into any such agreement and seeking AGCO approval.  In particular, White Label Agreements must not:

• Define the amount of product from the LP or its affiliates that must be offered for sale by the Retailer;
• Require a defined amount of display space at the retail space to be dedicated to products from the LP or its affiliates;
• Provide merchandising, marketing, or promotional activities to the LP or its affiliates; or
• Restrict the LP’s ability to have its products sold at other retail stores, or the Retailer’s ability to sell products produced by other LPs (or their affiliates). [9]

White Label Agreements and the Program are intended to benefit smaller LPs and Retailers, as they will enable the OCS to offer more products to Retailers, including products that have a short shelf life or are slower-moving.  It is important that Retailers and LPs monitor how the industry reacts to these changes. White Label Agreements also allow Retailers to further differentiate themselves from their competitors and to build brand loyalty and awareness.

Key Takeaways:

Given the rapid evolution of the cannabis industry, Retailers and LPs alike need to ensure they are familiar with and current on industry developments. The introduction of the OCS’s flow-through program and subsequent changes to the relevant regulations regarding material inducements are two such developments.  Both provide additional growth opportunities for LPs and Retailers but also present a minefield of potential pitfalls if the rules are not properly understood.  Becoming well-versed in the OCS’s Program and the AGCO’s rules regarding material inducements is crucial for Retailers and LPs who want to be able to avail themselves of these new opportunities without costly hiccups.

Anna Thompson-Amadei, Sotos LLP

Anna is an associate with Sotos LLP in Toronto, Canada’s largest franchise law firm. She is the head of the firm’s cannabis practice area. Please contact Anna at 416.572.7322 or athompson-amadei@sotos.ca if you would like to discuss this or any other topic relating to the operation of your business.

Don Houston, Sotos LLP

Don is one of our articling students for the 2022-2023 term.

[1] Brown, David. “Ontario’s New Flow-Through Model and Product Call Timeline, Comes with Pros and Cons, Says Producers and Retailers.” Stratcann September 1, 2021. https://stratcann.com/insight/ontarios-new-flow-through-model-and-product-call-timeline-comes-with-pros-and-cons-say-producers-and-retailers/
[2] Brown, David. “Ontario Chamber of Commerce Concerned with Province’s Plan to Ban In-House Cannabis Brands and Products” Stratcann March 4, 2022 https://stratcann.com/news/ontario-chamber-of-commerce-concerned-with-provinces-plan-to-ban-in-house-cannabis-brands-and-products/
[3] “Cannabis Retail Regulation Guide” Alcohol and Gaming Commission of Ontario https://www.agco.ca/book/export/html/19736
[4] “ Guidance Document- Inducements Rules for Licensed Cannabis Retailers” Alcohol and Gaming Commission of Ontario https://www.agco.ca/guidance-document-inducements-rules-licensed-cannabis-retailers
[5] Ibid
[6] Ibid
[7] Cannabis Licence Act, 2018, S.O 2018, C.12, SCHED 2.
[8] Maurer, Matt, “The “Return” of White-Labelling is a win-win-win for LPs, Retailers, and Consumers” Grow Opportunity. June 1, 2012.      https://growthopportunity,ca/legal-matters-2/?utm_source=rss&utm_medium=rss&utm_campagin=legal-matters-2
[9] Supra, note 4

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1. New Financing Amounts

The maximum loan amount for a borrower has been increased from $1 to $1.15 million,  which includes:

• $1 million for term loans of which a maximum of $500,000 is comprised of (1) equipment and leasehold improvements of up to $350,000; and (2) $150,000 for intangible assets and working capital costs.

and

• $150,000 for lines of credit for working capital costs. This would be over and above the $150,000 that can be used for working capital costs under the term loan product (above).

2. Term Loans

The amendments include two new financing classes – intangible assets and working capital costs can now be financed as term loans.  Intangible assets are defined as non-monetary assets without physical substance that can be sold, transferred, licensed, rented or exchanged or that arise from a contractual or other legal right.  This includes franchise fees, goodwill, incorporation costs and permits and licenses.

Maximum Loan Term

All term loans used to finance real property, leasehold improvements, equipment and intangible assets and working capital costs can now be made for a maximum of 15 years.  Equipment and leasehold improvement loans that are already registered (or disbursed and not registered) can be amended to the new 15 year term.

Appraisal of Eligible Expenditures

The time period to finance expenditures or commitments for any term loan has been increased from 180 days to 365 days prior to the date the term loan is approved.  If the lender is required to obtain an appraisal to finance a term loan, the date that the appraisal is made has been changed from 180 days before the term loan is approved to 365 days before the term loan is disbursed.

Security

For real property and equipment term loans, lenders must continue to take security in the assets financed.  Lenders must take security in any assets of the small business for the value of the loan for the following items:  leasehold improvement, computer software, website, intangible assets and working capital costs.

3. Line of Credit

Eligible businesses can now access a line of credit to be used for working capital costs (costs necessary to cover the day-to-day operating expenses of the business). Examples include: inventory, expenses related to the creation and development of software and websites, printed materials, professional fees (e.g. legal, accounting, appraisal), research and development costs, payroll and rent.  The line of credit may be used to pay for ongoing expenditures or commitments that arise or were invoiced no more than 365 days prior to the date that the line of credit was authorized. Lenders will be required to take security in any assets of the small business for the authorized amount of the line of credit.

Term and Renewal

The maximum term for the line of credit is 5 years beginning on the day after the line of credit is opened by the lender.  Prior to the end of the 5 year term, borrowers will have the following 3 options:

1. Re-register the line of credit for a new period of 5 years. In this case, a new registration form and a registration fee of 2% on the renewed authorized line of credit amount must be submitted to the CSBFP.
2. Borrowers can also convert the line of credit amount to a CSBFP term loan with a maximum 10-year CSBFP coverage. Any such term loan would need to meet the following conditions:

• • The interest rate must not be greater than the prime rate plus 5%;
  • The terms of the loan conversion must be set out in a document signed by the lender and the borrower and that provides a minimum of one principal and interest payment each year, with the first payment scheduled to be made within one year of the date of the conversion; and
  • The borrower and lender must enter into an agreement to repay the balance of the line of credit with a conventional loan.

3. The borrower and lender may enter into an agreement to repay the balance of the line of credit with a conventional loan.

Claim Process Documents and CSBFP Liability

Lenders must submit an attestation form signed by the borrower at the time the line of credit is registered stating that (1) the line of credit is to be used to pay for working capital costs of the day-to-day operational expenses of the small business, and (2) the expenses paid through the line of credit did not arise (and were not invoiced) more than 365 days before the line of credit was authorized.

The CSBFP’s liability for lines of credit for a lender is limited to 15% of the total amount of the lines of credit authorized and registered by that lender, separate and apart from a lender’s liability calculation for its registered term loans.

.   .   .

As noted above, one of the most significant changes for franchisees and franchisors is that franchise fees can now be financed under the CSBFP.  Prior to these changes, franchise fees were ineligible for financing under the program and had to be paid for out-of-pocket or through other credit products offered by financial institutions.

At Sotos LLP, we advise franchisors on all aspects of their franchise sales process including how to inform prospective franchisees on the availability of financing. We also help franchisors establish lending programs offered by preferred financial institutions to their prospective franchisees. We also assist prospective franchisees in their purchases of franchises. We would be happy to assist to provide tailored advice relating to the changes created to this important financing program. Please contact Anna Thompson-Amadei (athompson-amadei@sotos.ca) or John Yiokaris (jyiokaris@sotos.ca).

[1] https://ised-isde.canada.ca/site/canada-small-business-financing-program/en/find-loan-your-small-business/about-program/helping-small-businesses-get-loans
[2] https://ised-isde.canada.ca/site/canada-small-business-financing-program/en/documentation-centre/bulletins/2022-changes-canada-small-business-financing-program

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The six items being banned by the Regulations include: (1) checkout bags, (2) cutlery, (3) foodservice ware made from or containing problematic plastics that are hard to recycle, (4) ring carriers, (5) stir sticks, and (6) straws (with some exceptions, see below).

Business owners should be aware of the following key dates:

• The prohibition on the manufacture and import of checkout bags, cutlery, foodservice ware, straws (not packaged with a beverage container), and stir sticks will come into effect as of December 20, 2022.
• The prohibition on the sale of checkout bags, cutlery, foodservice ware, straws (not packaged with a beverage container), and stir sticks will be effective as of December 20, 2023. This will grant businesses 1 year to deplete existing stock.
• A ban on ring carrier manufacturing and import will be effective as of June 20, 2023.
• A ban on the sale of ring carriers and straws packaged with beverage containers (e.g. juice boxes) will come into effect as of June 20, 2024.
• A ban on the export of all six items by December 20, 2025. Note that banning exports was added to the final regulation, as it was not included in the government’s original proposal.

The Regulations include a number of exceptions to the ban, which exceptions include:

• Single-use straws for accessibility: The Regulations permit hospitals, medical facilities and long-term care facilities to sell single-use plastic flexible straws to patients or residents.
• Waste and bags for containing waste: The Regulations do not apply to plastic manufactured items that are waste, nor to items that are intended to hold waste (and do not meet the definition of single-use checkout bags).
• Products in transit: The Regulations do not apply to plastic manufactured items that are transiting through Canada. Whether a single-use plastic product is considered “in transit” is determined based on the final shipping destination of the product.

The announcement concludes almost 2 years of consultations with provincial and municipal governments, industry and individual Canadians. The public consultation process included a Science Assessment of Plastic Pollution, a discussion paper on an integrated management approach to plastic products, and a draft regulation.

During the press conference announcing the publication of the Regulations, Minister Guilbeault stated that Canada is not opposed to restricting additional items in the future. He also acknowledged that the plastic pollution problem cannot be solved through bans alone and that other actions are necessary to reach the government’s goal of zero plastic waste by 2030.

The Regulations are part of a larger movement, as outlined in Canada’s Zero Plastic Waste Agenda, which includes developing targets, standards and further regulations aimed at eliminating plastic pollution in Canada in the years to come.[2]  Businesses should continue to evolve to meet new requirements and find alternatives to single-use plastics being produced, sold or used in their operations, including researching, testing and comparing alternative products and contacting existing suppliers to determine if they have suitable product offering capabilities.   Lastly, businesses should refer to the government’s guidance document, which is intended to help businesses and organizations adapt to the proposed requirements and outlines important considerations for businesses navigating alternative products or systems. [3]  Business owners should familiarize themselves with this guide to ensure that their business decisions are aligned with the new Regulations and industry best practices.

At Sotos LLP, our team of industry experts has provided strategic advice to business owners in the development of best practices that respond to and address issues arising from the ever-evolving legal landscape for over 40 years.

Anna Thompson-Amadei, Sotos LLP

Anna is an associate with Sotos LLP in Toronto, Canada’s largest franchise law firm. She practices business law with a focus on franchising, licensing, and distribution. Please contact Anna at 416.572.7322 or athompson-amadei@sotosllp.com if you would like to discuss this or any other topic relating to the operation of your business.

Read part I and II of this article. 

[1] https://www.canada.ca/en/environment-climate-change/news/2022/06/government-of-canada-delivers-on-commitment-to-ban-harmful-single-use-plastics.html
[2] https://www.canada.ca/en/environment-climate-change/services/managing-reducing-waste/reduce-plastic-waste/canada-action.html
[3] https://www.canada.ca/en/environment-climate-change/services/managing-reducing-waste/consultations/proposed-single-use-plastics-prohibition-regulations-consultation-document.html

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What do prospective franchisees want?  The answer may be as varied as the people involved – but every single one of them wants to know one thing:  how much they can expect to earn, if they invest in your franchise system.

Understandably, prospects seek reliable information on operating costs and projected earnings (collectively called financial performance representations or “FPRs” in this article), to help them make an informed decision.  However, franchisors need to think carefully about what they can, should, and should not provide to prospective franchisees by way of FPRs.

Below is a summary of the legal rules in Canada relating to the provision of FPRs in franchising.  Franchisors must understand the legal parameters, as well as the practical realities relating to FPRs. Beyond what is contained in your legal documents, FPR questions can permeate all levels of your organization – which may make them a hidden area of operational risk.  With that in mind, we recommend an approach that goes well beyond legal drafting alone.

1. Option to Disclose FPRs in Canada

Six Canadian provinces have franchise-specific legislation with strict requirements about what must be disclosed to prospective franchisees. Those provinces are Ontario, Alberta, Prince Edward Island, New Brunswick, Manitoba, and British Columbia (collectively, the “Regulated Provinces”).   There are differences between each provincial franchise statute (collectively, the “Franchise Acts”) and related regulations, but they all share fundamental elements.[1]

Each of the Franchise Acts (other than Ontario) defines earning projections to include “…information given by or on behalf of the franchisor, directly or indirectly, from which a specific level or range of actual or potential sales, costs, income, revenue or profits from franchises, or businesses of the franchisor or of the franchisor’s affiliate of the same type as the franchise being offered can easily be ascertained”. The upshot is that such information can take many forms, so long as it meets the test.

As for the disclosure of FPRs, none of the Franchise Acts or their respective regulations contain a specific requirement to include either annual operating costs or earnings projections in the disclosure document.   Inclusion is optional, but certain obligations kick in, if FPRs are provided.

The relevant sections of Ontario’s Regulations read:

“If an estimate of annual operating costs for the franchise is provided, a statement specifying the basis for the estimate, the assumptions underlying the estimate and a location where information is available for inspection that substantiates the estimate.

If an earnings projection for the franchise is provided, a statement specifying the reasonable basis for the projection, the assumptions underlying the projection and a location where information is available for inspection that substantiates the projection.” [2]

The regulations of the other Regulated Provinces are much the same, though New Brunswick, Manitoba and British Columbia also mandate that if a franchisor chooses not to provide prospective franchisees with FPRs, the disclosure document must contain an explicit statement to that effect.[3]

2. The Rules, if the Franchisor does include FPRs in its Disclosure Document

As outlined in the excerpt above, in Ontario if a franchisor does elect to provide FPRs, it must also provide:

• a statement specifying the basis for the estimate of annual operating costs, or the reasonable basis for the earnings projection;
• the assumptions underlying the projection; and
• the place where substantiating information is available for inspection by the franchisee.[4]

The other Regulated Provinces’ Regulations are similar.[5]

3. Trends Against FPR Inclusion

Given the option, many franchisors in Canada choose to stay silent on FPRs in their disclosure documents (and explicitly state that they are not included, as required).  There are definite legal advantages to that choice.  So long as franchisors are able to attract franchisees without including this information, many conclude that it is legally wiser to let prospective franchisees obtain what information they can themselves, often through discussions with existing franchisees.

That avoids the risk of making an error in the disclosure document.  This danger looms especially large given that FPRs may be directly impacted by differences (or changes) in markets, demographics, individual franchisee performance, economic conditions, location and a myriad of other constantly shifting factors.  Newer franchisors, or those exploring new geographies or business offerings, are especially vulnerable to inaccuracy due to inadequate data. Further, the far-reaching effects of the outbreak of COVID-19 have made franchisors all the more leery about making projections or providing reliable cost estimates.

Errors in a disclosure document can have very onerous ramifications.   If a franchisee suffers a loss because of a misrepresentation contained in a disclosure document, it has a right of action against multiple parties, including the franchisor and every person who signed the disclosure document, personally. [6] This will include at least two directors and officers of the franchisor (if the franchisor has at least two officers and directors).[7]  Furthermore, the franchise legislation in the Regulated Provinces deems franchisees to have relied on any misrepresentation in the disclosure document.[8]

4. Trends Towards FPR Inclusion

Interestingly, however, U.S. franchisors are trending in the opposite direction –  with disclosure of FPRs growing markedly in popularity.[9] As of 2021, it was reported that two-thirds of U.S. franchisors were providing FPRs, as compared to just twenty percent in 1995.[10]

A survey of over 3,000 franchised brands in the U.S., covering the period from 2012 to 2016, found that increased transparency through FPR disclosure has been driven by market demand, with franchisors in more competitive spaces making greater FPR disclosure.[11]    This trend  may be a natural outcome of greater competition, combined with the fact the franchisees and their lenders want to see a system’s profit potential before investing in, or lending to, a specific brand.  In the U.S. market, FPR disclosure increases with higher brand investment levels and capital requirements.[12]

Though not always the case, U.S. trends in franchising do tend to move northward into Canada over time.  It may well be that FPR disclosure will come to be more prevalent in Canada as competitive forces increase, and as U.S. franchisors continue their expansion across the border.

5. Practical Considerations for Canadian Franchisors

Franchisors in Canada have much to think about when deciding how to address fundamental questions about costs and profitability raised by prospective franchisees. Decisions need to reflect an understanding of the rules, as well as the business realities and needs of the system.

When considering how to best manage the risks and rewards of FPR disclosure, the following practical considerations may be of help:

Do you have sufficient data to accurately provide FPRs?

• If not, hold off. The significant legal risk of providing incorrect or inadequate financial information is too great.  Furthermore, accurate, reliable information should be provided  in order to attract the right franchisees and establish a healthy relationship of mutual trust.

What should be the scope of the disclosure, if given?

• Units for which FPRs are provided should have been operating for at least one fiscal year, to give some time to gather data and account for the effects of seasonal changes.
• Top line sales may be the easiest and safest FPRs to disclose at the outset, because they are factual.
• Your choice of which units to provide information on is important. It’s better to provide the sales figures of all locations (both corporate and franchised), than to only reveal performance metrics of a smaller subset, as you could be accused of skewing figures.  That said, it may be worthwhile to group the information based on objective factors relevant to your system.   For example, subsets may be based on store size; format; region; urban vs. rural; operating hours; or any other factors, so long as they are fact-based, and can help give the prospective franchisee insight as to the basis and context of the FPRs.

Are You Inadvertently Providing FPRs Already?

• The above points relate to whether (and how) FPRs are made in your system’s disclosure document, but consider carefully whether they are being made outside of that document. Whether such information is provided by way of pro forma, income chart, cost calculator, sharing the results of other units, or scribbled notes at a sales meeting – consider whether the franchisor’s staff might unwittingly be making FPRs that will attract liability for you.
• Remember that an unvetted FPR can attract liability based on misrepresentation.  Further, provision of FPR information outside of the disclosure document may give credence to later assertions that the information qualifies as a “material fact”.  A material fact is defined in each of the Regulated Provinces’ Acts as a fact “that would reasonably be expected to have a significant effect on the value or price of the franchise to be granted [sold], or the decision to acquire [purchase]” the franchise.[13]   If the information is indeed  a “material fact”, then failure to include it in the disclosure document could be a material defect in the disclosure document, with serious implications, including possible rescission (cancellation) of the franchise agreement.

Where properly invoked, the rescission remedy obligates the franchisor to refund all money received (other than for inventory, supplies or equipment); repurchase the inventory, supplies and equipment; and compensate the franchisee for any losses that the franchisee incurred in acquiring, setting up and operating the franchise.  The time period for exercising this right is sixty (60) days for deficient disclosure[14] and two (2) years if the franchise disclosure document was never provided at all.[15]  While the law is not fully settled, Canadian courts have found that certain omissions are so fundamental that it is as though  the franchisee never received one at all.

6. Conclusion

The above survey of the law, trends and practical considerations relating to FPRs and franchise disclosure in Canada are by no means an exhaustive list.   Rather, they are a springboard for careful thought and decision-making about each franchisor’s own particular status and needs.

Choices on what FPRs (if any) to include in your disclosure document must be made after deep and wide analysis of your own system.  Furthermore, considerations will change with time.

Franchisors are well-advised to have systems in place to identify, maintain and check their financial performance data  – and disclosure documentation – on an ongoing basis.   Also, importantly, training and policies must be implemented to control what the franchisor’s staff shares with prospective franchisees, to avoid making FPRs in a way that attracts liability and/or rescission, outside of formal disclosure processes.

Jason Brisebois, Sotos LLP

Jason Brisebois is a partner in Sotos LLP’s corporate and franchise law groups. He has received multiple legal accolades, including being named in the “Ones to Watch” category by Best Lawyers in Canada. Additionally, he won the Lexology 2024 Client Choice Award for Franchising in Canada and was recognized as a “Legal Eagle” by Franchise Times Magazine. Jason can be reached directly at 416.572.7323 or jbrisebois@sotos.ca.

Anna Thompson-Amadei, Sotos LLP

Anna is an associate with Sotos LLP in Toronto, Canada’s largest franchise law firm. She has been recognized as a “Legal Eagle” by the Franchise Times Magazine. Anna can be reached directly at 416.572.7322 or athompson-amadei@sotos.ca.

[1] O Reg 581/00: General; Alta Reg 240/1995; PEI Reg EC2006 – F-14.1; NB Reg 2010-92; Man Reg 29/2012; BC Reg 238/2016, [collectively, the “Regulations”].
[2] O Reg 581/00: General, ss 6(2) and 6(3).
[3] BC Reg 238/2016 ss 10(2) and 11(2); NB Reg 2010-92 ss 4(2) and 5(2); Man Reg 29/2012 ss 10(2) and 11(2).
[4] Arthur Wishart Act (Franchise Disclosure), 2000, SO 2000, c 3 [“AWA”].
[5]Alberta requires disclosure of the percentage of outlets that meet or exceed each range of results, Alta Reg 240/1995. s. 16(b); The other Regulations require disclosure of the locations, areas, territories or markets of the franchises or franchisor businesses if the results from franchises/businesses of the same type as the franchise being offered.
[6] AWA, supra note 4, s 7(1);  Franchise Act, RSA 2000, c F-23, s 9(1); Franchise Act, RSPEI 1988, c F-14.1, s 7(1); Franchise Act, RSNB 2014, c 111, s 7(1); The Franchise Act, CCSM c F156, s 7(1); Franchise Act, SBC 2015 c 35, s 7(1).
[7] O Reg 581/00: General, s 7(2); Alta Reg 240/1995, s 2(3); PEI Reg EC232/06, s 4(3); NB Reg 2010-92 s. 6(2); Man Reg 29/2012, s 2(4); BC Reg 238/2016, S 7(3).
[8] AWA, supra note 4, s 7(2);  Franchise Act, RSA 2000, c F-23, s 9(2); Franchise Act, RSPEI 1988, c F-14.1, s 7(2); Franchise Act, RSNB 2014, c 111, s 7(2); The Franchise Act, CCSM c F156, s 7(2); Franchise Act, SBC 2015 c 35, s 7(2).
[9] https://franchise.law/franchise-disclosure-document/item-19/#:~:text=An%20FPR%20is%20an%20(I,gross%20profits%20or%20net%20profits.
[10] https://www.dwt.com/insights/2021/01/fpr-item-19-pre-covid-disclosure-requirements.
[11] See Anya Nowakowski, Financial Performance Representation: Market Demand Pushing Higher Levels of Transparency, 14 (IFA Education and Research Foundation, 2017).
[12] Ibid.
[13] AWA, supra note 4, s 1(1);  Franchise Act, RSA 2000, c F-23, s 1(1); Franchise Act, RSPEI 1988, c F-14.1, s 1(1)(l); Franchise Act, RSNB 2014, c 111, s 1(1); The Franchise Act, CCSM c F156, s 1(1); Franchise Act, SBC 2015 c 35, s 1(1).
[14] Ibid, s 6(1).
[15] Ibid, s 6(2).

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The government has asked stakeholders, partners, and Canadians to participate in the consultation period, which will run to March 5, 2022.  The plastics ban is slated to be implemented by the end of next year after the government has completed its review and consideration of comments from these consultations.[1]

Environment and Climate Change Minister Steven Guilbeault has said “Smart, clear and collaborative regulations will help drive innovation across the country as reusable and easier-to-recycle items take their place in our economy.” In November 2021, the government announced plans to invest $3.5 million in Montreal-based clean-tech company Polystyvert.[2]

While the ban of single-use plastic manufacturing and import is expected to come into force one year after the proposed regulations are registered, the manufacture and import of single-use plastics for the purposes of subsequent export outside of Canada is not subject to the proposed regulations.  The prohibition on the sale of single-use plastics is expected to come into force two years after the proposed regulations are registered.[3]

The federal government, as well as provincial and municipal governments, are likely to continue to expand and develop future regulations that will result in more plastic products and packaging being banned, or at least restricted.  It is imperative that businesses continue to evolve accordingly and consider alternatives to single-use plastics being produced, sold, or used in their operations.  While these regulations are almost 2 years away from being implemented, businesses can start taking steps to prepare. Namely:

• Consider current product offerings and whether or not they will still be sustainable as a result of the single-use plastics ban.
• Begin researching, testing, and comparing alternative products.
• Contact existing suppliers to determine if they have suitable product offering capabilities and, if not, begin researching alternative suppliers.

Further, the government has developed a guidance document to help businesses and organizations adapt to the proposed requirements.  The document outlines important considerations for businesses navigating alternative products or systems from those single-use plastics that the new legislation will ban.  It also provides a “management framework for single-use plastics”, which outlines the three steps that the government follows in assessing the environmental impact of a single-use plastic item. [4]  Business owners should familiarize themselves with this guide in order to align their business decisions with industry best practices.

At Sotos LLP, our team of industry experts has been helping business owners in the development of best practices that respond to and address issues arising from the ever-evolving legal landscape.

Anna Thompson-Amadei, Sotos LLP

Anna is an associate with Sotos LLP in Toronto, Canada’s largest franchise law firm. She practices business law with a focus on franchising, licensing, and distribution. Please contact Anna at 416.572.7322 or athompson-amadei@sotosllp.com if you would like to discuss this or any other topic relating to the operation of your business.

Read part I and III of this article. 

[1] https://www.canada.ca/en/environment-climate-change/news/2021/12/government-of-canada-moving-forward-with-banning-harmful-single-use-plastics0.html
[2] https://www.canada.ca/en/innovation-science-economic-development/news/2021/11/government-of-canada-supports-leading-edge-company-specializing-in-polystyrene-recycling-that-helps-protect-the-environment.html
[3] https://www.gazette.gc.ca/rp-pr/p1/2021/2021-12-25/html/reg2-eng.html
[4] https://www.canada.ca/en/environment-climate-change/services/managing-reducing-waste/consultations/proposed-single-use-plastics-prohibition-regulations-consultation-document.html

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Another change that came into effect is the ratification and implementation of the Madrid Protocol (concerning the International Registration of Marks).  The Madrid Protocol is an international system that allows applicants to file a single application for the registration of a trademark with the World Intellectual Property Organization and designate multiple other member countries – resulting in an “international registration”.  This effectively means that applicants from around the world can apply for protection of a trademark in up to 125 countries in one single application.

Third Party Trademark Research and Protection Services

Given the changes to the Act discussed above, and the rapidly evolving trademark landscape, brand owners, both domestic and international, should consider engaging companies that offer trademark research and protection services.   These service providers generally offer a wide range of services that can be tailored for the individual needs and concerns of brand owners, including monitoring and notification services.

Third party trademark research and protection services generally include:

• Worldwide trademark monitoring (the service provider will provide reporting on word and design marks internationally);
• Worldwide ownership monitoring (the service provider will report on competitors’ activities, their use of trademarks, and monitor and report on the use of the client’s own trademarks worldwide);
• USPTO Pending Application monitoring (the service provider will compare the client’s pending application against newly filed applications on a weekly basis,  and notify the client of any potential conflicts before the client’s trademark is published for opposition);
• USPTO Official Gazette monitoring (the service provider will monitor the newly published USPTO trademark applications and identify the client of any potential conflicts);
• Domain Name monitoring (the service provider will monitoring and reporting on any relevant domain names as they become available); and
• Auction monitoring (the service provider will monitor the sale of the client’s branded goods on eBay, Alibaba and Taobao auction sites globally, in order to identify potential counterfeiters).

Trademarks are some of the most valuable intellectual property that businesses, especially franchisors, may own.  At Sotos LLP, we have acted for hundreds of trademark owners in every aspect of protecting their intellectual property for more than 40 years. We have extensive knowledge of intellectual property issues, and regularly act in the procurement and licensing of trademarks, as well as in defending our clients’ trademarks rights and opposing trademark applications on behalf of our clients.

Please contact the writer at athompson-amadei@sotos.ca or John Yiokaris at  jyiokaris@sotos.ca to discuss your intellectual property and trademark issues.

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Sotos LLP will continue to monitor government announcements and we will update and circulate this Informational Circular as warranted.

1. Ontario Small Business Support Grant

Applications are open for the new Ontario Small Business Support Grant (“OSBS”).  The OSBS is available for small businesses that have been required to close or significantly restrict services under the province-wide shutdown effective December 26, 2020.

The grant starts at $10,000 for all eligible businesses, and provides all eligible businesses with funding to a maximum of $20,000 to cover decreased revenue expected as a result of the province-wide shutdown.

Businesses can use the support however they choose (for example, to pay employee wages or to assist in maintaining their inventory).

Applicants must demonstrate that they experienced a revenue decline of at least 20% when comparing their monthly revenue in April 2020 to that of April 2019.  The government has explained that this time period was selected because it reflects the impact of the public health measures taken in the spring of 2020, and as such, provides a representation of the possible impact of these measures on small businesses.[1] Businesses that were established since April 2019 are also eligible provided they meet the other eligibility criteria.  In order to receive OSBS, small businesses must meet the following criteria:

• be required to close or restrict services subject to the province-wide shutdown that went into effect on December 26 2020;
• have fewer than 100 employees at the enterprise level; and
• have a Canada Revenue Agency (“CRA”) business number.

Businesses are not eligible if they were already required to close prior to the modified Stage 2 measures that were introduced on October 10, 2020, or if they are essential businesses permitted to operate with capacity restrictions (e.g., discount and big box stores selling groceries, supermarkets, grocery stores, convenience stores, pharmacies, and beer, wine and liquor stores).[2]

On March 24, 2021 the government announced a second round of support through the OSBS.  Businesses that were determined as eligible for the first round will automatically be entitled to a second payment in the same amount as the first payment.

2. Rebates for PPE and Property Taxes

The Government of Ontario is providing businesses a one time grant of up to $1,000 to assist with the cost of personal protection equipment (“PPE”). To be eligible, businesses must have between 2 and 19 employees and be in one of the following sectors: retail, accommodation and food services, repair and maintenance, personal and laundry services, gyms and yoga studios, and arts, entertainment and recreation.

Applicants are required to submit receipts or proof of costs for PPE purchased since March 17, 2020.  This includes: gloves, gowns, face shields, eye protection, masks, sanitizer, sanitizing wipes, thermometers, temperature monitors or cameras, physical changes (including the installation of hand sanitizer stations and plexiglass dividers) and signs to guide or inform customers and employees.

Eligible businesses may also apply for rebates of municipal and education property taxes. Funding will cover the entire length of time that regionally targeted public health restrictions are in place.

In order to apply, applicants will need to provide general business information (for example, CRA business number) and their banking information (for example, banking institution, account number, branch code).  Further, they will need to submit proof of costs – meaning their property tax bills (or proof of costs associated with property taxes).[3]

3. COVID-19 Energy Assistance Program for Small Business

The COVID-19 Energy Assistance Program for Small Business (“CEAP”) provides a one-time, on-bill credit to eligible small business and registered charity customers. Small business and registered charity customers may be eligible for up to $1,500 in support to be paid towards their electricity, unit sub-meter provider (“USMP”) or natural gas bills (both or separately).

In order to be eligible for CEAP, small businesses and registered charities must have an active account with an electricity distributor, USMP or a natural gas distributor, and the applicant’s account must meet certain usage criteria. The applicant must also have a registered business number or charitable registration number for the small business or registered charity operating out of the premises.  Further, the applicant must have overdue amounts owing from one or more electricity or gas bills since March 17, 2020. [4]

Funding for CEAP is limited, and utilities are expected to process applications in the order in which they are received. As such, submitting an application for CEAP does not guarantee funding. Applicants who applied and received CEAP support in 2020 can apply for the increased funding amount.  Applicants must apply through their utility provider.

4. Pausing Commercial Evictions

The Government of Ontario has temporarily banned evictions for tenants who have been approved for the Canada Emergency Rent Subsidy (“CERS”).  Any such tenant (with proof of approval) will be protected from eviction for a 12-week period from the date of approval. If a tenant re-applies for a new CERS payment, the 12-week ban is effectively restarted from the date of the new CERS approval.

Tenants must provide their landlord with proof of each new approval. The last possible date a CERS-approved tenant could be protected from eviction is April 22, 2022.[5]

5. Employer Health Tax relief

The Employer Health Tax (“EHT”) is a payroll tax on remuneration paid to employees and former employees.  Due to the outbreak of COVID-19, the Government of Ontario has increased the EHT exemption from $490,000 to $1,000,000 permanently.

To be eligible for the tax exemption, employers must be “eligible employers” as defined under the EHT Act. As such, employers who have a municipal representative on their board of directors, or who are under the control of any level of government, are generally not eligible employers.  Further, employers normally cannot claim the exemption if their Ontario payroll for the year (including the payroll of any associated employers) is over $5 million (except for eligible employers).[6]

6. Regional Opportunities Investment Tax Credit

The Regional Opportunities Investment Tax Credit is a 10% refundable corporate income tax credit for capital investments. The tax credit has a cap of $500,000 and is available for expenditures in excess of $50,000.  It is available to Canadian-controlled private corporations who make qualifying investments that became available for use on or after March 25, 2020.  Examples include expenditures for constructing, renovating, or acquiring eligible commercial and industrial buildings and other assets in designated Ontario regions.[7]

At Sotos LLP, our team of experts has been advising businesses in the automotive, restaurant, grocery, personal, home and professional services, hotel, retail and cannabis sectors as they face challenging economic and financial issues relating to the current pandemic. Please contact us if you wish to discuss your eligibility for any of the government assistance programs, and to determine an effective approach to combatting business challenges caused by the outbreak of COVID-19.

Anna Thompson-Amadei, Sotos LLP

Anna is an associate with Sotos LLP in Toronto, Canada’s largest franchise law firm. She practices business law with a focus on franchising, licensing, and distribution. Please contact Anna at 416.572.7322 or athompson-amadei@sotosllp.com if you would like to discuss this or any other topic relating to the operation of your business.

[1] https://www.ontario.ca/page/businesses-get-help-covid-19-costs#section-1

[2] https://www.ontario.ca/page/businesses-get-help-covid-19-costs#section-0

[3] https://www.ontario.ca/page/businesses-get-help-covid-19-costs#section-1

[4] https://www.oeb.ca/rates-and-your-bill/covid-19-energy-assistance-programs/covid-19-energy-assistance-program-small

[5] https://www.ontario.ca/page/renting-commercial-property-ontario#section-1

[6] https://www.fin.gov.on.ca/en/tax/eht/index.html

[7] https://www.ontario.ca/page/regional-opportunities-investment-tax-credit

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The federal government has introduced the Canada Emergency Rent Subsidy (“CERS”) which has replaced the Canada Emergency Commercial Rent Assistance.  CERS will be available retroactively to September 27, 2020 until June 2021, and the current parameters will apply until June 5, 2021.

CERS takes landlords out the equation by delivering aid directly to applicants. The subsidy is available on a sliding scale – the amount of the subsidy that eligible organizations receive will be proportional to the amount of their revenue losses.  The maximum base rate subsidy is 65% for organizations with a revenue drop of 70% or more. The base rate then declines to a rate of 40% for organizations with a revenue drop 50%, and gradually reduces to 0% for organizations that have not experienced a decline in revenues. The federal government’s CERS website provides a calculator that applicants can use to calculate the amount they can apply for.[1]

Eligible expenses include commercial rent, property taxes, property insurance, and interest on commercial mortgages for a qualifying property, less any subleasing revenues.[2]  Further, only expenses paid under rental agreements in writing that were entered into before October 9, 2020 (and continuations of those agreements) and are related to real property located in Canada are eligible.  If the applicant has not paid the amounts due for the eligible expenses yet, they must attest that these amounts will be paid within 60 days of receiving the rent subsidy payment.

Non-eligible expenses include any expenses that were paid or payable to non-arm’s length entities[3] or for a timeframe that falls outside of the claim period.  Qualifying properties include any buildings or land in Canada that the applicant’s business or organization owns or rents and uses during the course of ordinary activities.  Properties that do not qualify include: residential properties, properties used to earn rental income from arm’s-length parties or any properties that are primarily used to earn rental income directly or indirectly from a non-arm’s length party, that are primarily used by that party to earn rental income.[4]

Expenses for each qualifying period will be capped at $75,000 per location and be subject to an overall cap of $300,000 that would be shared among affiliated entities.

Eligible entities include individuals, taxable corporations, trusts, and non-profit organizations and registered charities.  In order to be eligible, organizations must meet one of the following criteria:

1. Have a payroll account as of March 15, 2020 or have been using a payroll service provider;
2. Have a business number as of September 27, 2020 (and satisfy the Canada Revenue Agency that it is a bona fide rent subsidy claim); or
3. Meet other conditions that may be prescribed in the future.

For the purposes of calculating the CEWS, an entity’s revenue is its revenue from its ordinary activities (in Canada) earned from arm’s-length sources, determined using its normal accounting practices. Revenues from extraordinary items and amounts on account of capital are not counted.  Special rules will be provided in order to take into account certain non-arm’s-length transactions – for example, where an entity sells all of its output to a related company that in turn earns arm’s length revenue.

[5]

Applicants can apply for the rent subsidy retroactively for any period up to 180 days after that period has ended.

Lockdown Support

The new Lockdown Support will provide a 25% top-up as additional support to businesses with locations that are temporarily forced to close or have their business activities significantly restricted by a public health order issued by a federal, provincial, or municipal government, or a local health authority.  This includes situations where the organizations has had to shutdown as a result of an outbreak of COVID-19.

In order to qualify for the Lockdown Support, a business must:

1. have a base rent subsidy rate of more than 0% for the claim period;
2. qualify for the base CERS; and
3. be required to completely shut the location down; or cease some or all of the activities at the location and it must be reasonable to conclude that the ceased activities were responsible for at least 25% of the revenues of your business at that location.

In order to apply, a public health order must be limited based on one of these factors: geographical boundaries, type of business or other activity or risk associated with a particular location.  It must also result in sanctions or be an offence if the business not does comply.[6]

All applications must be made on or before 180 days after the end of the qualifying period. [7] Applicants can apply for CERS as of November 23, 2020.

At Sotos LLP, our team of experts has been advising businesses in the automotive, restaurant, grocery, personal, home and professional services, hotel, retail and cannabis sectors as they face challenging economic and financial issues relating to the current pandemic. Please contact us if you wish to discuss your eligibility for any of the government assistance programs, and to determine an effective approach to combatting business challenges caused by the outbreak of COVID-19.

Anna Thompson-Amadei, Sotos LLP

Anna is an associate with Sotos LLP in Toronto, Canada’s largest franchise law firm. She practices business law with a focus on franchising, licensing, and distribution. Please contact Anna at 416.572.7322 or athompson-amadei@sotosllp.com if you would like to discuss this or any other topic relating to the operation of your business.

[1] https://www.canada.ca/en/revenue-agency/services/subsidy/emergency-rent-subsidy/cers-calculate-subsidy-amount.html#h-3
[2] Note that any sales tax component of these costs would not be an eligible expense.
[3] Note that on February 24, 2021, the government announced a proposed change to amend the rules in the Income Tax Act so that Lockdown Support would be available in situations where the activities of a party not dealing at arm’s length are required to cease as a result of a “public health restriction”, that party rents the property from the entity, and all other conditions for the Lockdown Support are met.
[4] https://www.canada.ca/en/revenue-agency/services/subsidy/emergency-rent-subsidy/cers-expenses-claim.html
[5] https://www.canada.ca/en/department-finance/news/2020/11/canada-emergency-rent-subsidy.html
[6] https://www.canada.ca/en/revenue-agency/services/subsidy/emergency-rent-subsidy/cers-calculate-subsidy-amount.html
[7] https://www.canada.ca/en/revenue-agency/services/subsidy/emergency-rent-subsidy/cers-how-apply.html

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