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Updated on October 11, 2023
The franchise business model is very popular with Quebec entrepreneurs. The world of franchises does have special tax characteristics however.
This article presents a number of aspects that franchisors and franchisees should know to maximize their tax situation.
Tax treatment of advertising funds
For a new entrepreneur, the franchise business model offers the possibility of joining a network and brand that the general public is already familiar with. As a result, some advertising is often carried out for the franchisees by a central service coordinated by the franchisor.
Generally, the franchisees pay an annual contribution that is goes into an advertising fund. This fund is then used by cover advertising activities on behalf of the group.
Is the franchisee’s contribution to the advertising fund a deductible expense? What about the franchisor who receives the contribution?
The franchise agreement often provides information to better understand the franchisee’s and franchisor’s control of the advertising fund. The Canada Revenue Agency expressed its opinion in a technical interpretation (9819787 Redevances à recevoir, Fonds de publicité) to clarify the appropriate tax treatment for franchisors and franchisees.
The franchisor has no control over the contributions
When neither the franchisor nor the franchisee controls the advertising fund, contributions to the advertising fund are deductible expenses for the franchisees, since they are incurred to earn income. The expense is therefore deductible in the year it is paid or payable.
In the franchisor’s case, if the franchisor made a contribution to the advertising fund, the contribution is deductible, as it is for the franchisee. Since control of the advertising fund is not among the franchisor’s various obligations towards the franchisees, it can be concluded that, even though the franchisor receives the contributions, the franchisor is independent of the fund and the expense is deductible.
For the same reason, the contributions will not be included in the franchisor’s income, since they are not owned by the franchisor. It should be noted that, from an accounting stand point, transactions affecting the advertising fund are generally recognized exclusively on the balance sheet and have no impact on earnings.