Updated March 2025
“Canadian franchises contribute over $120 billion CAD per year to the Canadian economy and create jobs for almost 2 million Canadians.” Canadian Franchise Association (CFA)
Franchising is a strong and growing sector in Canada’s economy. Currently, there are “more than 66,000 franchise locations across over 50 different categories including retail, hospitality, food service, automotive, education, business services, and health care” (CFA).
The owners of each franchise location in Canada should understand how franchise taxes work in order to optimize tax benefits and achieve accurate financial planning.
4 Key Types of Taxes Franchisees Face
#1 – Corporate Taxes
When a franchise business is incorporated in Canada, it becomes a separate legal entity responsible for filing its own corporate tax returns within six months of the business’s fiscal year-end. The corporation pays taxes on its taxable income, but franchise owners are still required to pay personal income tax on any salaries, dividends, or other income they receive from the corporation.
General corporate tax rates range anywhere from 26% to 31%, depending on the province. However, Canadian residents that own and operate a private corporation may be eligible for a lowered ‘small business’ tax rate, ranging from 10% to 18%, on a portion of their net income.
#2 – Income Tax on Net Income
Canadian franchisees are also subject to an income tax on their net income total, which represents the total revenue generated from their business minus all eligible deductions and expenses. This means that franchisees must carefully track and calculate their earnings and expenses to determine their taxable income.
#3 – Payroll Tax
Franchise owners with employees are required to keep current on payroll taxes by registering and remitting a portion of the withheld amount to the Canada Revenue Agency (CRA). Regular payments must be made on the amount owed, and each employee’s total income and deductions are reported annually via T4 slips.
Canadian franchise owners are responsible for providing requested financial information to lending institutions, investors, franchisors, and the CRA. It’s advisable to hire a chartered professional accountant (CPA) to ensure full compliance with CRA regulations.
#4 – Goods and Services Tax/Harmonized Sales Tax (GST/HST)
The Goods and Services Tax (GST), also known as the Harmonized Sales Tax (HST), is a sales tax applied to most goods and services in Canada. If operating in a participating province, all franchisees are required to register, collect, and remit the GST/HST in accordance with their corporate tax calculations.
#5 – Withholding Tax
If the franchisor is a non-resident who collects fees from a Canadian franchisee, there is also a withholding tax obligation.
To explain further, a non-resident withholding tax in Canada “mandates that Canadian businesses withhold taxes on specific payments made to non-residents, particularly for services rendered within Canada…Non-resident withholding tax is typically paid by the entities or individuals who are making payments to non-residents” (TurboTax Canada).
Franchise Fees and Tax Implications
The initial franchise fee that franchise owners pay in exchange for a license to do business is classified as a depreciable expense for Canadian tax purposes. It is depreciated on a straight-line basis over the life of the franchise agreement. This means that franchisees must plan their finances accordingly, knowing that the full tax benefit is spread out over several years.
Furthermore, ongoing royalties and fees like it are tax-deductible since they are considered operational expenses, reducing overall taxable income.
Understanding Financial Reporting Engagements
In Canada, financial reporting engagements refer to different levels of financial statement preparation and assurance provided by accountants to businesses. They play a crucial role in meeting tax requirements by ensuring that businesses maintain accurate financial records that comply with CRA standards. There are three main types of engagements:
- Notice to Reader (NTR) Engagement – This is the most basic level of financial reporting, where an accountant compiles the financial statements from your bookkeeping records. The accountant is responsible for ensuring that the financial information is mathematically correct but gives no assurance that the information provided is accurate. This is suitable for smaller franchise businesses and is often used for internal business management and tax filing.
- Review Engagement – A review engagement goes a bit further, and the accountant performs limited analysis and review to ensure financial statements are plausible. This engagement is often required by lenders or franchisors to verify financial health.
- Audit Engagement – This offers the highest level of assurance. It’s a comprehensive review where the auditor will verify financial accuracy through testing and external confirmations. It’s a time-consuming process, and it’s usually required by larger franchises, investors, or franchisors as part of due diligence.
Practical Tips for Franchisees
Understanding your tax obligations might seem complicated, but it’s vital for long-term success. With the help of professionals and the right structure in place, the tax process is much less daunting. A few key steps to take include:
- Keep detailed records of income and expenses
- Set up systems for regular tax reporting and financial tracking
- Retain business records for at least 6 years to meet the CRA requirements
- Hire professional accountants or legal advisors to ensure compliance and help you take full advantage of possible tax breaks
- Perform regular reviews of provincial and federal tax updates to avoid penalties
Ready to Own a Franchise in Canada?
If you’re ready to begin your entrepreneurial journey, FranNet is here to help you get started. Our expert franchise consultants in Canada will evaluate your skills and goals to match you with the right franchise. We’ll answer any questions you have and walk you through the process from start to finish. Schedule your free consultation today!