Franchise vs Independent Restaurant: Tax Differences in Royalties and Fees — CPA Firm Near You, Montreal

Introduction

Choosing between launching a franchise restaurant or operating an independent business has major tax implications. Franchise royalties, advertising fees, start-up costs, and ongoing obligations all affect your taxable income differently from the costs of running an independent restaurant. Understanding these differences helps you reduce tax exposure, plan cash flow, and structure your business for long-term growth. This guide explains key tax distinctions, compliance requirements, and how a CPA firm near you in Montreal can help you make the right decision based on financial impact.

Legal and Regulatory Framework

The Income Tax Act and the Taxation Act of Quebec allow businesses to deduct franchise royalties, advertising fund contributions, training fees, and certain start-up expenses if they directly relate to earning business income. Franchise fees may need to be capitalized and amortized over several years, depending on the nature of the agreement. Independent restaurants may deduct operating expenses immediately if they qualify as current expenditures. GST/HST and QST rules apply differently to upfront franchise fees versus ongoing royalties. CRA and Revenu Québec require full documentation of franchise agreements, fee structures, and payment schedules to support deductions and tax treatment.

Key Court Decisions

Courts have clarified that franchise fees with long-term benefits must be treated as capital expenditures and amortized rather than deducted in a single year. In several rulings, taxpayers attempted to deduct large franchise entry fees immediately, but the courts denied the deductions because the benefits extended beyond the tax year. Other decisions confirm that royalties tied directly to revenue are deductible as operating expenses. Judges consistently emphasize that the terms of the franchise contract determine tax treatment, and inadequate record-keeping leads to denied deductions.

Why CRA and Revenu Québec Target Franchise Fees

Franchise structures involve multiple payments that can be misclassified. CRA and Revenu Québec often verify whether initial franchise fees were properly capitalized, whether royalty deductions match declared sales, and whether advertising fund contributions were calculated correctly. Franchise audits also cross-check royalties reported by the franchisee with royalties declared by the franchisor. Independent restaurants face different audit risks, typically around undocumented expenses and inaccurate COGS. Maintaining clear documentation is essential for both models.

Mackisen Strategy

At Mackisen CPA Montreal, we help business owners evaluate the tax and financial impact of choosing a franchise or operating independently. For franchisees, we review franchise agreements, classify fees properly, plan amortization schedules, and ensure compliance with GST/QST obligations. For independent restaurants, we build streamlined accounting systems, maximize deductions, and implement strong documentation controls. We also guide clients through audits involving franchise royalty verification or independent expense reconstruction to prevent reassessments.

Real Client Experience

A Montreal entrepreneur opened a franchise restaurant and deducted the full initial franchise fee in the first year. CRA reassessed, arguing the fee was a capital expenditure with long-term benefits. We reviewed the agreement, prepared a proper amortization schedule, negotiated with auditors, and reduced penalties. For a separate client running an independent café, we optimized expense classifications and helped rebuild documentation during a QST audit, avoiding significant reassessment.

Common Questions

Are franchise royalties deductible?

Yes. Royalties paid as a percentage of revenue are generally deductible as operating expenses.

Are initial franchise fees deductible immediately?

Usually no. They must often be amortized because they provide long-term benefits.

Are advertising fund contributions deductible?

Yes, if they are mandatory under the franchise agreement and relate to business income.

Which option gives better tax deductions: franchise or independent?

It depends. Independent restaurants often have more deductible current expenses, while franchises have structured fees but stronger brand and operational support.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps businesses stay compliant while recovering the taxes they’re entitled to. Whether you’re filing your first GST/QST return or optimizing multi-year refunds, our expert team ensures precision, transparency, and protection from audit risk.