Legal Update: The Impact of U.S. Tariffs and Canadian Counter Tariffs on the Franchise Industry

By: Jason Brisebois, Nicole Perez and Peter Viitre

On March 3, 2025, the Trump administration confirmed that the United States would proceed with imposing blanket tariffs on imports from Canada and Mexico, and increases to existing tariffs on China, effective March 4, 2025. These tariffs include a 25% tariff on all imports from Canada and Mexico, with the exception of Canadian energy resources and minerals, which face a reduced 10% tariff. The tariffs were initially planned to take effect on February 4, 2025, but were delayed by the Trump administration pursuant to ongoing negotiations with Canada and Mexico. The White House has also announced the imposition of 25% U.S. tariffs on all steel and aluminum imports with an expected effective date for imposition of March 12, 2025.

On March 4, 2025, the Government of Canada announced that, in response to U.S. tariffs, the Government of Canada would move forward with 25% tariffs on $155 billion worth of imported U.S. goods, beginning immediately with a first tranche covering $30 billion worth of goods. The scope of the Canadian counter tariffs will be increased to $155 billion if the current U.S. tariffs are maintained, and may also be increased if new U.S. tariffs are imposed. Beyond the federal government’s response, several Canadian provinces have implemented their own retaliatory measures. These include restricting government procurement opportunities for U.S. suppliers, terminating existing contracts and disqualifying future bids from U.S. companies, and removing American alcoholic products from provincially-controlled liquor stores. Ontario Premier Doug Ford has also indicated that he is considering imposing an export tax on Ontario-produced energy, and even halting energy and certain mineral resource exports altogether.

The implementation of U.S. tariffs and Canadian counter tariffs on imported goods will have widespread effects across various industries, including the franchise sector. Franchisors and franchisees must understand and prepare contingencies on how to navigate the legal and business consequences posed by the rising costs, disrupted supply chains and shifting market dynamics associated with these tariffs.

Supply Chain Analysis: Key Considerations for the Franchisor-Franchisee Relationship

Franchisees that depend on imported goods—whether for equipment, supplies, or inventory—may face substantial cost increases due to tariffs. For instance, tariffs on raw materials, such as steel and aluminum, as well as finished products, will likely drive up operational expenses and delay deliveries, potentially disrupting the system’s supply chain. This will impose increased costs on franchisees, which will necessitate a difficult decision between absorbing such costs, passing them on to customers, or a combination of both. Many franchise agreements also require the use of specific materials and equipment to maintain consistency throughout the system, which may limit (absent franchisor intervention) the ability of franchisees to easily adapt to changing economic circumstances.

Maintaining a strong franchisor-franchisee relationship is key in navigating these changing market conditions. Below are certain key considerations for franchisors in navigating this relationship:

Initial Investment: Franchisors must consider whether they should make changes to their initial investment expectations and requirements for franchisees. If tariffs increase the cost of equipment, supplies, or inventory, franchisors should consider reviewing and revising the initial investment estimates to reflect these higher costs. Failure to do so may mislead potential franchisees about their expected expenses. Moreover, failing to account for such changes may be setting franchisees up for failure before they even begin operating.
Ongoing Expenses and Unit Economics: Franchisors should evaluate how tariff-induced cost increases affect their unit economics, including per-location profitability, break-even points, and overall financial sustainability. Clearly presenting this data can help franchisees make informed investment decisions. If tariffs impact ongoing costs, such as supply procurement or vendor agreements, these changes should be disclosed. Franchisees should be made aware of potential cost fluctuations. Franchisors should assess franchisee costs on a market-by-market basis, and prepare to be flexible on procurement where necessary to ensure that franchisees’ unit level economics remain viable in light of this volatility.
Supply Chain and Sourcing Restrictions: If a franchise system mandates specific suppliers affected by tariffs, these restrictions should be transparently disclosed. Franchisors may also explore whether allowing some flexibility in supplier selection can help mitigate disputes, and actively work with franchisees to assess whether domestic alternatives exist that will (while perhaps not entirely consistent with brand standards applicable in the U.S.) allow the franchisee to continue operating without further hardship than is necessary.
Financial Performance Representations: Franchisors should monitor profit margins and other financial metrics due to tariff-related cost increases and assess whether tariff-related cost increases are a development that impacts financial performance representations. Providing outdated or overly optimistic projections could expose franchisors to legal claims and otherwise adversely impact the franchisor-franchisee relationship.

Consumer Price Sensitivity

Franchisors should also consider whether to authorize or encourage price increases for goods and services. However, price-sensitive consumers may reduce their spending or seek alternatives, particularly in highly competitive industries such as quick-service restaurants, retail, and hospitality. It is critical that franchisors consider balancing necessary price adjustments with consumer expectations in order to maintain brand reputation and profitability. In light of these challenges, franchisors should consider which obligations currently imposed on franchisees are crucial to maintaining brand standards, and which others may be more flexible.

Adapting to Tariffs for Growth and Expansion

Predictable costs and strong unit economics are the hallmarks of a successful franchise system. While tariffs imposed by the U.S. and Canada’s counter tariffs may create new cost pressures, they also present opportunities for Canadian brands to emphasize domestic production and sourcing, which can resonate with consumers and differentiate them in the market. Similarly, U.S. brands entering Canada may still find opportunities to expand, particularly when the favourable exchange rate helps offset tariff impacts, allowing cost-competitive pricing in the Canadian market. Franchisors and businesses that adapt their supply chains, pricing strategies, and brand positioning to these evolving dynamics can still find opportunities for growth and expansion despite the shifting trade landscape.

Opportunities and Competitive Shifts

While tariffs impose significant challenges for businesses of all stripes, they also provide opportunities for savvy and opportunistic businesses. For example, Canadian franchise systems with predominantly domestic supply chains may reap the benefits of changing consumer preferences towards Canadian-made products, while products previously bound for the U.S. may be sold domestically at the same or lower prices. Franchisors can also re-evaluate global sourcing strategies to mitigate tariff exposure.

To address ongoing challenges, franchisors should consider the following actions:

Supply Chain Diversification: The tariffs should prompt franchisors to carefully re-evaluate suppliers and explore domestic alternatives where feasible.
Negotiating Terms: Franchisors and franchisees should also work with suppliers to share or reduce tariff-related cost burdens.
Efficiency Measures: Franchisors and franchisees should invest in technology or streamline operations to offset increased expenses.
Franchise Disclosure and Agreement Revisions: It is critical that franchisors assess whether franchise disclosure documents and franchise agreements need adjustments to address unforeseen consequences arising from the tariffs.

Advertising Considerations: Made in Canada

While not the primary focus of this article, businesses should keep in mind that promoting products as “Made in Canada” or “Product of Canada”, or highlighting Canadian ownership, can be a valuable strategy for brands seeking to reduce the impact of tariffs between Canada and the United States. However, businesses must ensure that such claims comply with Canadian law, including the Competition Act, the Consumer Packaging and Labelling Act, and the Textile Labelling Act. These acts prohibit false or misleading representations, and restrict how and when such claims can be used. Businesses that choose to make “Made in Canada” or “Product of Canada” claims must ensure their claims meet the appropriate guidelines and thresholds. Our firm works closely with companies to develop compliant, strategic branding approaches that not only highlight Canadian origins, but also help navigate cross-border trade challenges.

Conclusion

U.S. tariffs present significant challenges for the franchise industry, with potential legal and financial implications for franchisors and franchisees alike. If you have any concerns as to how these tariffs will affect your system, and how to navigate these challenges, Sotos LLP can help. At Sotos LLP, we have acted for hundreds of clients in every aspect of the franchising process for over forty years. We have extensive knowledge of the regulatory issues that may arise from the introduction of tariffs and regularly assist with supply chain evaluations, contract revisions, and strategic planning to mitigate risks and seize opportunities in this complex regulatory environment. Our firm can assist in developing tailored strategies to mitigate the impact of tariffs, whether through supply chain restructuring, trade compliance planning, or leveraging available exemptions We can also assist in reviewing disclosure requirements in light of the tariffs.

Please contact Peter Viitre at 416.977.7754 or pviitre@sotos.ca, Jason Brisebois at 416.572.7323 or jbrisebois@sotos.ca, or Nicole Perez at 416.977.3674 or nperez@sotos.ca to see how we can help your franchised business adapt to ever-changing economic conditions.