With Canada being home to over 1,200 franchise brands and the second largest franchise industry globally, many successful Canadian franchisors naturally look south to the massive US market for their next phase of growth.
But international expansion isn’t simply about replicating your successful Canadian model across the border. Despite cultural similarities and geographic proximity between the two countries, US franchisors considering expansion in Canada must take into account significant cultural, linguistic, demographic, judicial and statutory differences – and the same applies in reverse for Canadian franchisors entering the US.
The complexities that often catch Canadian franchisors off guard go far beyond the obvious considerations like franchise documents and marketing strategies. After guiding hundreds of international franchisors through US market entry, we’ve identified four critical areas that demand careful planning but are frequently overlooked: corporate structure decisions, tax strategy and revenue flow, trademark protection, and market adaptation.
Corporate structure: who will actually be your franchisor?
The first question every Canadian franchisor must answer sounds deceptively simple: who will sign the franchise agreements in your new territory? This decision has profound implications for everything from liability protection to tax efficiency.
The entity decision
Once a company gets to the point where they expect to create a permanent establishment, they should consider whether to forge ahead and operate through a branch of the Canadian corporation or if it would be more beneficial to set up a new US subsidiary.
- Branch operation: Your existing Canadian corporation operates directly in the US market. This maintains simplicity but creates potential exposure.
- US subsidiary: Form a new US corporation or limited liability company (LLC) to serve as your franchisor entity. This provides liability protection and can offer tax advantages, but increases complexity and compliance costs.
Permanent establishment considerations
Canadian franchisors must understand permanent establishment (PE) rules, which determine tax obligations on both sides of the border. A Canadian corporation creates a PE if a person (or agent) in the US habitually concludes contracts on behalf of the Canadian entity or maintains authority to bind the Canadian business legally.
Key PE triggers include:
- Maintaining a US office or place of business
- Having employees working regularly in the US
- Agents with contract authority
- Construction projects lasting over 12 months
The implications are significant. If you’re running your business in Canada through a Canadian-Controlled Private Corporation (CCPC) and are looking to expand to the US, any income derived from a US permanent establishment will not qualify for the small business deduction.
Tax strategy: planning for cross-border revenue flow
Tax planning might be the most complex aspect of international expansion, but it’s also where poor planning can be most costly. Canadian franchisors must navigate withholding taxes, repatriation strategies, and dual-country compliance requirements.
Withholding tax on royalties
US withholding tax of 10 percent is applied on royalties paid by US franchisees to your Canadian entity, pursuant to the Canada-US tax treaty. This applies in reverse as well. The withholding occurs “at source,” meaning the US franchisee remits it directly to the IRS.
Tax treaty benefits
Under the US-Canada tax treaty, business profits are generally exempt from tax in the non-resident’s country unless the business is carried on through a permanent establishment. Proper structuring is essential to access these protections.
The CCPC challenge
For franchisors operating through CCPCs, US expansion can impact eligibility as a Qualifying Small Business Corporation (QSBC). If shares do not qualify as QSBC shares, shareholders lose the ability to claim the lifetime capital gains exemption.
Trademark protection: securing your most valuable asset
Your trademark represents your most valuable franchise asset – the brand equity you’ve spent years building. But trademark rights are territorial, meaning Canadian registrations don’t automatically protect you in the US.
Beyond national borders
Trademark registration should be filed early to block others from registering or using your marks abroad.
The Madrid Protocol advantage
Since 2019, Canadian franchisors can use the Madrid Protocol to streamline international trademark protection across 120+ jurisdictions.
US-specific considerations
The US requires proof of actual use in commerce before registration, even under the Madrid Protocol. This can cause delays.
Priority and timing
Early filing is key to avoiding “trademark squatters.” The Madrid Protocol preserves your Canadian filing date as the priority date for your US application.
Market adaptation: beyond translation and currency
Perhaps the most underestimated complexity of international expansion is adapting your franchise system to work effectively in a new market.
Regulatory environment differences
- Canada: Six provinces currently have franchise disclosure legislation; Saskatchewan’s is pending for 2025. Definitions vary by province.
- United States: Federal compliance obligations are set by the FTC, but 15 states require registration or filing before offering franchises. Unlike Canada, the FTC can impose fines and pursue legal action.
Operational adaptations
Canadian franchisors must adapt in areas such as:
- Real estate and site selection
- Supply chain logistics
- Pricing and menu adaptation
- Labor and employment laws
Getting started: a measured approach
Successful international expansion requires patience, planning, and professional guidance. Essential steps include:
- Conduct thorough market research specific to your target regions
- Engage qualified international tax advisors early
- Secure trademark protection through the Madrid Protocol or direct filing
- Develop a compliance strategy for both federal and state-level requirements
- Test your concept through a company-owned location before franchising
The opportunity for Canadian franchisors in international markets remains substantial. But success requires recognizing that international franchising isn’t just domestic franchising with different documents. The franchisors who thrive internationally are those who invest the time and resources to understand and properly navigate these hidden complexities from the start.
For Canadian franchisors ready to explore US expansion, Spadea Lignana offers comprehensive guidance through every stage of international franchise development, from initial market assessment to successful launch and ongoing compliance.
