Buying a Franchise: Tax Considerations for Franchise Fees and Royalties — CPA Firm Near You, Montreal

Introduction

Buying a franchise in Quebec — whether in food service, retail, fitness, automotive, hospitality, or personal services — comes with unique tax considerations that differ from starting an independent business. Franchise fees, royalties, advertising fund contributions, training costs, and equipment purchases all have specific tax rules. Misunderstanding these can lead to missed deductions or reassessments. This guide explains the tax implications of buying and operating a franchise, and how a CPA firm near you in Montreal can help ensure proper planning and compliance.

Legal and Regulatory Framework

Under the Income Tax Act and the Taxation Act of Quebec, franchise owners face the following key tax elements:

1. Initial Franchise Fee

The upfront franchise fee is typically considered an eligible capital expenditure (now treated as depreciable property under Class 14.1).
• It must be capitalized and amortized over time
• Cannot be deducted in full in the first year

2. Royalties and Advertising Contributions

These are current business expenses and are deductible annually, including:
• Ongoing percentage-of-sales royalties
• National or regional advertising fund contributions
• Technology/system fees

3. Leasehold Improvements and Build-Out Costs

Commercial build-outs must be capitalized and depreciated over the asset’s useful life.
GST/QST ITCs/ITRs may be claimed where applicable.

4. Equipment and Technology

• Kitchen equipment, POS systems, furniture, signage, and computers are generally capital assets
• Depreciated through Capital Cost Allowance (CCA)

5. GST/QST Registration

Almost all franchises exceed the small-supplier threshold, so GST/QST registration is mandatory from day one.

6. Franchise Disclosure Legislation

Quebec operates under the Civil Code and requires proper disclosure documents. Franchisors must provide detailed financial and contractual documents.

Key Court Decisions

Courts have ruled that:
• Franchise fees must be capitalized — deducting them as immediate expenses is not allowed
• Leasehold improvements must follow proper depreciation rules
• Franchisees cannot deduct royalties that relate to personal or non-business benefits
• Advertising and marketing contributions are deductible as long as they align with the franchise agreement
• Failure to maintain proper financial records can result in denied ITCs/ITRs
• Franchise termination costs may or may not be deductible depending on circumstances

Judges emphasize that franchise obligations must match actual expenses claimed.

Why CRA and Revenu Québec Target Franchise Businesses

Franchises are frequently audited because they often involve:
• Substantial build-out and start-up costs
• Multiple locations and complex accounting systems
• High cash flow and inventory movement
• Strict trademark, advertising, and royalty obligations
• Potential unreported sales or cash discrepancies
• GST/QST errors at high transaction volumes

Auditors review:
• Franchise agreements
• POS reports
• Bank deposits
• Royalty reports submitted to franchisors
• Supplier invoices and ITC/ITR claims

Mackisen Strategy

At Mackisen CPA Montreal, we help franchise owners build profitable, compliant operations. We:
• Review franchise agreements for tax implications
• Set up accounting systems aligned with franchisor requirements
• Track capital vs current expenses
• Calculate correct amortization for franchise fees and build-outs
• Prepare GST/QST remittances based on high-volume retail operations
• Optimize payroll, royalty deductions, and advertising contributions
• Prepare year-end tax filings and financial statements
• Build audit-ready documentation

Real Client Experience

A Montreal franchisee deducted the entire franchise fee in one year; CRA reassessed. We reclassified the item to Class 14.1 and negotiated reduced interest and penalties. Another franchise owner struggled with high royalty and ad-fund deductions due to poor tracking; we implemented a system that aligned with franchisor reports and prevented future discrepancies.

Common Questions

Are franchise fees deductible?

Yes — but only through amortization under Class 14.1.

Are royalties deductible?

Yes, ongoing royalties and advertising fund contributions are fully deductible.

Do franchises need GST/QST registration?

Yes, registration is mandatory.

Are build-out costs deductible?

Yes, but through depreciation (CCA), not as immediate expenses.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps franchise owners manage tax obligations, optimize deductions, and maintain full compliance with CRA and Revenu Québec. Whether opening a single unit or expanding to multiple locations, our expert team ensures precision and audit protection.