Franchising in Canada: managing reservation deposits

A prospective franchisee wants to reserve a future franchise and offers to pay a deposit. For a business preparing to expand through franchising, that payment may seem reassuring. Yet accepting it too early can jeopardise legal compliance. In Canada’s franchise sector, reservations must be structured around provincial disclosure rules, rather than simply following the company’s usual commercial practices.

1. Distinguish a reservation from a financial commitment

Before asking for money, clarify what you want to secure: an expression of interest, a period for reviewing the application or a contractual commitment. These objectives do not necessarily require payment.

A business accustomed to taking advance payments from customers should not automatically apply the same practice to prospective franchisees. Here, the payment relates to the acquisition of a franchise and may trigger specific legal protections.

The label attached to a payment does not, on its own, determine its legal treatment. Calling it a ‘reservation deposit’, ‘application fee’ or ‘advance payment’ does not in itself bypass disclosure requirements. You need to examine the payment’s actual purpose, who receives it and the refund conditions.

Prepare an internal checklist answering four questions:

• What right does the prospective franchisee receive in return?
• Is the amount fully refundable, and in what circumstances?
• At what point might the franchisor become entitled to retain it?
• Will it be credited towards a later payment?

If the answers remain unclear, hold off on taking payment. Simply adding someone to a list of prospective franchisees may be enough during the initial assessment, without promising an exclusive reservation.

2. Check provincial rules before taking any payment

In Canada, franchise-specific regulation is a provincial responsibility. You should therefore not use a nationwide deposit policy without checking the rules applicable to each proposed location.

In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 requires, subject to statutory exceptions, that the prospective franchisee receive the disclosure document at least fourteen days before signing an agreement relating to the franchise or paying any consideration. Certain exceptions exist, but you must confirm that they apply before receiving money or asking anyone to sign a document.

In Manitoba, The Franchises Act and the Franchises Regulation also require advance disclosure. The government guide states that a refundable deposit of up to C$100,000 is permitted. This limit is neither a commercial recommendation nor permission to apply the same approach elsewhere in Canada. The proposed arrangements must meet the conditions of this exception.

In New Brunswick, the Franchises Act requires the prospective franchisee to receive the disclosure document at least fourteen days before whichever happens first: signing an agreement relating to the franchise or paying consideration to the franchisor or a person associated with it.

The prudent approach is not to request any payment until the applicable waiting period has expired, unless your legal adviser has expressly confirmed an exception. Having a related company collect the money is not a way around the rules.

3. Draw up a clear reservation procedure

Ask your legal adviser to prepare the necessary documents and also check when they may be signed. A reservation agreement may itself constitute an agreement relating to the franchise, so delaying payment does not necessarily resolve the issue of signing.

Where a reservation is legally permissible, its operation must be explicit. Specify its duration, what is being reserved, each party’s commitments and the events that bring it to an end. Avoid implying that a site or territory has been definitively allocated if that is not the case.

Also describe the refund procedure: whom to contact, what information is required, how the money will be returned and the stated processing time. Do not describe a deposit as unconditionally refundable if you intend to deduct administrative charges later.

The reservation terms must be consistent with the disclosure document and draft contracts. They must not seek to make the prospective franchisee waive mandatory statutory protections.

4. Put a control in place between recruitment and accounts

Before launching your franchise offering, designate someone with authority to approve every deposit request. The franchise recruitment team should not be free to send a payment link as soon as a prospective franchisee expresses interest.

Give the accounts team clear instructions not to treat deposits automatically as revenue available to spend. Obtain advice on their accounting treatment and keep separate records of amounts received, refunded or credited towards contractual fees.

Finally, test a withdrawal scenario. Does your team know how to end the reservation and return the money without improvised negotiations? A simple procedure reduces friction and helps build trust from the first discussions.

Key takeaway: before accepting a deposit, confirm the relevant province, the statutory timetable and the refund conditions. If money is not essential at this stage, wait.