Franchising Beyond the Border
When considering a business expansion, franchisors often look beyond their own markets to escape oversaturation and embrace a new challenge. For many, Canada is an attractive option given the U.S.’s traditionally friendly trading relationship, shared values, borders, and similar culture. According to Restaurants Canada, the Canadian food service industry is expected to grow 3.9 percent per year on average, on par with overall population growth. No matter how healthy the restaurant industry may be in a new market, challenges are likely to arise whenever your company crosses borders.
As you’re preparing for growth, make sure you’ve modeled scenarios and asked yourself key questions before making moves. For instance, consider how the U.S. arm of your company can optimally support Canadian counterparts. Have you thought about the differences in minimum wage rates, and how operations in the U.S. can support its Canadian business? How are you keeping books and tracking filing requirements in the states – does it make sense to outsource the Canadian accounting once you expand?
As tax reform muddles some decision making here in the U.S., remember that taxation up north will add another layer of complexity. In Canada, most items are subject to a recoverable sales tax (GST/HST) at 13 percent. The rules can be intricate for some types of operations, especially with the fast casual and casual food sectors. Companies should be sure to understand this tax and how to charge. Businesses should also register and file with the Canadian Revenue Agency to recover taxes paid. In addition, certain payments from CDN entities to U.S. entities are subject to non-resident withholding taxes. These amounts should be understood and investigated prior to making cross-border payments to ensure no penalties are charged. Yearly filings are required for these taxes. Companies are also subject to payroll taxes, and yearly tax filings (T2's).
Aside from tax considerations, there are several key accounting challenges as well. Companies franchising in Canada are required to provide a franchise disclosure document (FDD) to Canadian franchisees. Though the requirements are similar to U.S. requirements, there are some noted differences that should be reviewed with an experienced Canadian franchise lawyer. Additionally, as part of Canadian FDD requirements, U.S. GAAP financial statements (FS) do not meet the requirements for presenting FS in Canada. A Canadian accountant can assist in ensuring financial reporting obligations are met.
Among G7 countries, Canada is the easiest place to start a new business—regulations around forming a new business are considerably more flexible, and procedures required to establish a business, such as government approvals and lawyer consults, are the fewest. As a result, it takes less time to establish a new business in Canada than in any other G7 country. However, it’s important not to assume that the market will be the same as in the U.S. It can take time for a concept to integrate into the Canadian market.
Expanding internationally can seem like an onerous task but taking such a big risk could have the potential to reap big rewards. Be sure to talk to your accounting professional to guarantee your business is set up for success no matter where you expand next.
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