Ontario Government Amends Franchise Regulations

The amendments are intended to clarify matters in the regulations that were either unclear or were unintentionally omitted from the original regulations. However, and perhaps unfortunately, at least one of the changes may lead to new complications for certain foreign-based franchisors.

Some of the more noteworthy amendments are:

• A definition of “franchisor's agent” was added in order to clarify the right of action for damages against agents that is included in the Wishart Act. Before, the term was undefined. A “franchisor's agent” is now defined as a sales agent of the franchisor who is engaged by the franchisor's broker and who is directly involved in the granting of a franchise.
• Audited financial statements must now be prepared in accordance with the generally accepted auditing standards set out in the Canadian Institute of Chartered Accountants Handbook. Previously, only reviewed financial statements needed to comply with the standards set out in the Canadian Institute of Chartered Accountants Handbook. This amendment may be the most troubling, in that U.S. and other foreign-based franchisors, and their advisers, need to consider whether their existing audited statements will suffice, and if not, what alternatives are available by March 22, 2004, being the date the amendments come into effect.
• The mandatory disclosure of all costs associated with the franchise was amended to limit the disclosure to only the costs associated with the establishment of the franchise. Previously, the regulation required disclosure of all costs associated with the establishment and operation of the franchise. This is a positive development, and brings Ontario into line with the disclosure regimes in other jurisdictions.
• All franchise location closures that occurred within the 3 fiscal years immediately preceding the date of the disclosure document must be disclosed. Previously, the regulation required continuous disclosure of all such closures within the previous 3 calendar years from the date of the disclosure document. This too is a positive development, as it simplifies the task of keeping disclosure documents current.
• The criteria for the exemption from the requirement to provide financial statements in the disclosure document have been expanded to recognize situations in which a franchisor meets the criteria because it is controlled by a corporation that meets the prior criteria for the exemption. Certain franchisors that previously did not qualify for the financial statement exemption may now qualify.

Certain defects in the regulations under the Arthur Wishart Act (Franchise Disclosure), 2000 (the “Wishart Act”) have been apparent to many in Canada's franchise community since the Wishart Act came into full effect on Jan. 31, 2001. Now, the Ontario government, through the Ministry of Consumer and Business Services, has released amendments to the regulations under the Wishart Act effective March 22, 2004.