The International Hotel Law Review: Canada

Introduction

The hotel industry is governed by legislation from all levels of government in Canada – federal, provincial and municipal or regional. This chapter provides a high-level overview of the legal requirements affecting the hotel industry in Canada.

Market entry

i Foreign investment and property ownership

Whether a non-Canadian investor acquires a business with a presence in Canada or establishes a new Canadian business, the investment may be subject to foreign investment review (i.e., approval) or the simple administrative notification requirements of the Investment Canada Act (ICA). One of the following thresholds will apply to most direct acquisitions of control of a Canadian business by non-Canadian investors that will determine if pre-closing approval is required:

  1. C$1.613 billion (2020) in enterprise value of the target where the acquirer or the target is a non-state owned enterprise (SOE) 'trade agreement investor';
  2. C$1.075 billion (2020) in enterprise value of the target where the non-SOE acquirer or target are controlled in other World Trade Organization (WTO) member states;
  3. C$428 million (2020) in asset value if the investor is an SOE controlled in one or more WTO member states; or
  4. C$5 million in asset value of the target in all other cases, or if the target carries on a cultural business (this latter, low threshold, may be relevant for a hotel acquisition).

If the investor is an SOE, then an investment that is subject to review or approval requires the filing of detailed information concerning the target business and the investor's plans for it. The review process generally takes at least 45 to 75 days. A non-Canadian investor will be required to satisfy the relevant minister that the transaction will likely be of 'net benefit' to Canada before the minister will approve the transaction. In determining 'net benefit to Canada', the minister must consider:

  1. the effect of the investment on the level and nature of economic activity in Canada;
  2. the degree and significance of participation by Canadians in the Canadian business and the industry of which it forms a part;
  3. the effect of the investment on productivity, industrial efficiency, technological development and product innovation and variety in Canada;
  4. the effect of the investment on competition within an industry in Canada;
  5. the compatibility of the investment with national industrial, economic and cultural policies; and
  6. the contribution of the investment to Canada's ability to compete in world markets.

If the minister initially decides that the investment will not be of such benefit, the non-Canadian investor will be given an opportunity to make representations and submit undertakings with respect to the investment with a view to satisfying these requirements. It is typical for a non-Canadian investor to agree to give written undertakings to the government of Canada to secure approval. Such undertakings often include promises relating to employment and expenditures in Canada and Canadian participation in the business.

The typical thresholds that apply to the acquisition of a Canadian business are the relatively high trade agreement or WTO investor thresholds (~C$1.6 billion and ~$1.1 billion respectively). However, a business that carries on a cultural business is subject to the much lower C$5 million threshold. Hotels are sometimes caught by this lower cultural threshold that triggers an approval requirement because they often engage in activities that may be cultural, such as the sale of books, newspapers and movie rentals. Careful review of these issues with legal counsel is recommended.

The ICA also provides that any transaction can be reviewed on the basis of national security concerns. If the identity of the buyer or the location of the hotel may give rise to such concerns, careful review of Canada's national security review regime is also strongly recommended.

Although rejections are rare, it is strongly advised to plan early for the ICA review process to minimise the risk of a negative outcome.

Further, non-residents may purchase, hold and dispose of real property in Canada as though they are residents of Canada, pursuant to the federal Citizenship Act. However, each province has the right to restrict the acquisition of land by individuals who are not citizens or permanent residents, in addition to corporations and associations controlled by such individuals.

Each province has different legislation addressing the particularities of foreign ownership of Canadian real property. In Ontario, for example, non-citizens have the same rights as Canadians to acquire, hold and convey real property, though corporations incorporated in jurisdictions other than Ontario must obtain a licence to acquire, hold or convey real property. Non-residents who dispose of real property situated in Canada are subject to withholding tax requirements under the federal Income Tax Act.

A non-resident corporation may carry on a business in Canada directly through an unincorporated branch (a Canadian branch) or indirectly through a wholly owned Canadian subsidiary (a Canadian subsidiary).

ii Carrying on business through a Canadian subsidiary

In general, a Canadian subsidiary will be resident in Canada for Canadian income tax purposes and subject to Canadian income taxation on its worldwide income. In 2019, the combined federal and provincial corporate tax rate applicable to a general corporation was between 23 per cent and 31 per cent, depending on the province to which the relevant taxable income was attributable.

Dividends paid or credited by a Canadian subsidiary to a non-resident will be subject to a Canadian withholding tax rate of 25 per cent, subject to reduction under any applicable tax treaty. Interest paid or credited by a Canadian subsidiary to a non-resident generally will be exempt from Canadian withholding tax, unless the non-resident does not deal at arm's length with the payor or the interest is participating debt interest (very generally, interest that depends on the success of the payer's business or investments). Canada has an extensive network of international tax treaties, which may provide partial or full relief from any such withholding tax. Canada's thin capitalisation rules will effectively require a non-resident corporation to provide at least 40 per cent of its investment in a Canadian subsidiary as equity, by prohibiting the Canadian subsidiary from deducting interest on debts owing to the non-resident corporation (or any other non-resident person who is non-arm's length with the non-resident corporation) to the extent such debts exceed 1.5 times the Canadian subsidiary's equity. Any such excess interest is deemed to be a dividend for Canadian withholding tax purposes.

A Canadian subsidiary generally will be subject to Canadian income taxation on realised capital gains at a rate equal to 50 per cent of the applicable corporate income tax rate. A non-resident generally will be subject to Canadian income taxation on capital gains realised on the disposition of shares of the Canadian subsidiary, unless the shares are not taxable Canadian property or the gain is tax-exempt under an applicable tax treaty. In general, shares of a corporation that are not listed on a designated stock exchange will not constitute taxable Canadian property, unless at any time in the previous 60-month period more than 50 per cent of the fair market value of the shares was derived directly or indirectly from Canadian real or immovable property, certain Canadian resource property, or options in respect of or interests or rights in any such property, whether or not such property exists. Different requirements apply for shares that are listed on a designated stock exchange.

A Canadian subsidiary will be required to file Canadian income tax returns annually. Subject to certain qualifications, the non-resident corporation will be required to file Canadian income tax returns with respect to the disposition of taxable Canadian income.

iii Carrying on business through a Canadian branch

In general, a non-resident corporation carrying on business in Canada through a Canadian branch will be liable for Canadian income taxation on its Canadian-source business income at the same rate that applies to Canadian-resident corporations. Under Canada's tax treaties, business profits earned through a Canadian branch will generally not be taxable in Canada to the extent such profits are not attributable to a permanent establishment or deemed permanent establishment situated in Canada.

A non-resident corporation carrying on business in Canada through a Canadian branch will be subject to an additional 25 per cent 'branch tax' on, very generally, its Canadian-source after-tax business profits that are not reinvested in the Canadian business. The branch tax is intended to be functionally analogous to the Canadian withholding tax on dividends, and is usually reduced under an applicable tax treaty where the treaty provides for a reduced dividend withholding tax rate. The Canadian branch will also be subject to Canada's thin capitalisation rules (discussed above), except that the debt to equity ratio will be replaced with a 3:5 debt-to-net asset ratio.

A non-resident corporation generally will be subject to Canadian income taxation on capital gains realised on the disposition of real or immovable property situated in Canada (whether held through the Canadian branch or otherwise) and property used or held in, goodwill in respect of, or inventory of the business carried on in Canada through a Canadian branch. In general, gains realised on the disposition of shares of the non-resident corporation that are not listed on a designated stock exchange will be subject to Canadian income taxation where such shares constitute taxable Canadian property (as defined above).

A non-resident corporation will be required to file a Canadian income tax on business profits from return for each taxation year in which it carries on business in Canada through a Canadian branch.

iv Foreign currency controls and repatriation of income

There are no foreign exchange or currency controls in Canada, nor are there exchange restrictions on borrowing from abroad, on the repatriation of capital or on the ability to remit dividends, profits, interest, royalties and similar payments from Canada. As noted above, there may be a withholding tax payable on the repatriation of certain types of income, including interest and dividends.

Legal structures

Generally, both asset acquisitions and share acquisitions are common in Canada. Canadian hotel transactions typically involve the following common forms of ownership or interest in real property: freehold, condominium, mortgage or charge, easements and leasing.

There are various avenues for investment in hotels in Canada, including corporations, partnerships, limited partnerships, trusts, co-ownerships and condominiums.

i Land titles

Each Canadian province has its own systems for registering interests in real property. In Ontario, for example, there are two land registration systems: registry and land titles. Most Ontario properties are in the land titles system, which is operated by the province pursuant to the Land Titles Act. Title to land within this system is guaranteed by the province. Where the land titles system applies, each document submitted for registration is certified by the province and, until this certification is complete, the registration is subject to amendment at the request of the registry officials.

In other provinces, registration systems vary. In the western provinces, for example, land falls exclusively within the provincial land titles systems. These systems are similar to the land titles system in Ontario, creating an 'indefeasible title' that is good against the world, subject only to certain limited exceptions. In the Atlantic provinces, on the other hand, registry systems dominate land registration, except in New Brunswick, where its land titles system encompasses most of the land in the province. Québec has its own unique system for registering interests in land, which in its effect is more similar to a registry system than to a land titles system.

ii Planning or zoning

All Canadian provinces regulate property development to some degree, and often this regulation occurs at the municipal level. Official plans, zoning by-laws, development permits, subdivision by-laws and servicing by-laws are the primary means by which municipalities control land use and development.

At the provincial level, the subdivision of land is restricted by statute in a number of Canadian provinces. In Ontario, the Planning Act is the main statute that controls subdivision. In British Columbia and many other provinces, the Land Title Act of that province is the main statute that controls subdivision. In addition, most provinces have legislation granting power to municipalities to regulate the subdivision and servicing of lands. In most cases, instruments such as transfers, subdivision plans or separation of title, which result in the issuance of separate titles, and instruments such as leases, mortgages or discharges, which deal with part of a parcel, require subdivision approval.

Developments on Aboriginal lands are subject to a unique set of legal regimes governing ownership interests and security arrangements.

iii Environmental considerations

Further, in Canada, there is a legislative framework at both the provincial and federal level that governs the duties of land owners with respect to the storage, discharge and disposal of contaminants and other hazardous materials connected with real property. The liability for improper environmental practices runs with the land and can be inherited by future owners of the property, which is important in all types of real property transactions, including hotels. In certain circumstances, any guardian of a property, such as a tenant pursuant to a retail lease, may face liability for contamination. Commercial lenders in Canada will customarily require the completion of an environmental assessment of a property before the advance of funds.

iv Licensing considerations

Most municipalities in Canada, including major cities such as Toronto, will require hotel operators to obtain municipal licenses to operate hotels and serve food or beverages.

Leases

Hotel leases in Canada now typically arise in the context of smaller hotels, lower-profile secondary market locations and downmarket brands; most larger international brands active in the Canadian marketplace moved away from hotel leases to hotel management and franchise agreements many years ago, as they had a strong preference to better allocate operational risks that are essentially passed through to the brand if a hotel lease structure is employed.

Though provisions in hotel leases may vary significantly, the following is a list of some typical provisions:

Rent

Typically, there is a base rent payable by the tenant that may increase gradually over the term. Sometimes, this is coupled with an obligation for the tenant to pay as percentage rent a specified portion of revenue or net operating income to the landlord as well. In unusual circumstances no base rent is payable and rent is calculated solely on the basis of revenue or net operating income, but, as this creates significant risk for the landlord in the event of poor hotel performance, it is not favoured and is rarely seen because landlords typically prefer a more stable income stream.

Length of term

Unlike with many commercial leases in Canada, it is not uncommon for hotel leases to have initial terms of 10 years or more, with the tenant having the right to renew or extend the lease for additional terms. In some provinces, land transfer tax is payable if the tenant wishes to register the hotel lease or evidence of the hotel lease in the applicable land titles office and the term (including renewals) exceeds a minimum length. Such registration may be desirable or even required for the tenant's financing purposes.

Base rent on renewal or extension

This may be set in advance, but it is more common to see future base rent specified to be determined in accordance with then-prevailing market rates, and for the hotel lease to include arbitration provisions to apply if the landlord and tenant cannot agree on the new base rent.

Repairs

Hotel leases typically require the tenant to maintain and repair the premises during the term of the lease at its cost, often to a specified standard. The landlord is often required to carry out structural and roof repairs and replacements, and is permitted to pass the associated costs on to the tenant on an amortised basis.

Insurance

Insurance provisions in a hotel lease can be complicated. Landlords are usually responsible for insuring the building as a whole, and are permitted to pass the associated costs on to the tenant. The tenant is typically required to obtain liability, property and business interruption insurance at its own cost.

'Management Agreement' type provisions

If it is intended that the tenant will itself operate the hotel during the term, hotel leases may include provisions akin to those typically found in a hotel management agreement. In particular, the tenant may be obligated to maintain certain standards. Additionally, if the rent payable by the tenant includes a percentage rent component based on hotel performance, the tenant may be obligated to prepare and deliver annual budgets to the landlord, maintain proper books and records and make them available to the landlord for inspection, and there may be performance tests during the term.

It is worth noting that in October 2017 the landlord of The Four Seasons Hotel Vancouver sued Four Seasons Hotel Ltd for breaching their hotel lease (which was executed over 30 years ago). The landlord is alleging that Four Seasons has failed to maintain a standard consistent with other luxury hotels, and is seeking to compel Four Seasons to complete a multi-million dollar capital investment prior to the expiry of the lease in January 2020. The case is ongoing.

Intellectual property and branding

Federal laws on patents, copyright and trademarks provide the principal protection for intellectual property in Canada. Canada is also a member of the WTO agreement on Trade-Related Aspects of Intellectual Property Rights and has agreed to the minimum standards of protection and reciprocal treatment provided in this treaty.

i Trademarks

The federal Trademarks Act protects interests in words, symbols, designs, slogans or a combination of these to identify the source of goods or services. It is, therefore, a key form of intellectual property that is relied upon by hospitality businesses to establish and maintain their brand.

Rights in a trademark are created through use in Canada. Registration of a trademark is permissive and not mandatory. Registration does, however, give the registrant the exclusive right to use the mark throughout Canada and facilitates enforcement, for example, by establishing prima facie evidence of ownership of a trademark and the ability to commence an action under the infringement provisions of the Trademarks Act. Without a registration, an owner's rights are limited to the geographic area where the mark has been used and its rights may be enforced against another party under common law remedies such as the tort of passing off rather than by asserting statutory trademark infringement.

A trademark registration can be renewed indefinitely provided that the owner uses it in association with all of the goods or services for which the trademark is registered. The first term of a trademark registration is for 10 years and is renewable for successive 10-year terms on payment of a renewal fee. The definition of trademark “use” in association with the goods and services for which a trademark is registered is defined within the Trademarks Act. While a trademark endures for as long as the owner uses it to identify his or her goods or services, registrations can be attacked on the basis of non-use or invalid registration.

If the trademark owner intends to license its trademark for use by others, even by a subsidiary or related company, proper control over its use by the licensee is essential for proper protection. More specifically, under the Trademarks Act, the use of a trademark, whether registered or not, by a trademark licensee is deemed to be use by the owner of the trademark (i.e., the licensor), provided that the owner has, under the licence, direct or indirect control of the character or quality of the goods or services provided by the licensee that bears the licensed trademark. Otherwise, the trademark, if it is registered, may be at risk of cancellation on the basis of non-use by the trademark owner. This direct or indirect control of the licensee is usually memorialised in the licence agreement.

A recent Federal Court decision relevant to the hospitality sector touches upon the question of whether a trademark registered in association with 'hotel services' was used in Canada when the trademark owner does not actually operate a Canadian bricks and mortar hotel. Hilton Worldwide Holding LLP v. Miller Thomson, 2018 FC 895 was an appeal by Hilton Worldwide Holding LLP (Hilton) of the Registrar of Trademark's (Registrar) decision to cancel the trademark WALDORF-ASTORIA, registered in association with 'hotel services'. Hilton operates a number of WALDORF-ASTORIA hotels around the world, but has no operations in Canada. However, Hilton operates a website, reservation or booking services, and a loyalty program, to enable Canadians to access information and book or redeem stays at WALDORF-ASTORIA hotels outside Canada. Hilton also provides communications to Canadians such as booking confirmations that include the trademark in question. Despite the foregoing, the Registrar took the position that '[u]nlike retail store services, however, a hotel cannot be operated via the Internet or a telephone number; it is contrary to common sense to equate the ability to make hotel reservations or other bookings with the operation of a hotel…' In other words, the Registrar held that a 'bricks and mortar' hotel in Canada is required to establish use of a trademark in association with 'hotel services' and providing only 'ancillary or incidental' services such as operating websites, booking services, and loyalty programs is not enough to constitute trademark use. The Registrar accordingly expunged the trademark.

In allowing Hilton's appeal and reversing the Registrar's decision to expunge the trademark, the Federal Court reaffirms that services in trademark registrations should be construed liberally and may encompass primary, incidental or ancillary services. The Court also noted that this liberal construction does not strain the ordinary meaning of 'hotel services' in view of the ways Canadians can book reservations, including making online reservations. Given the facts, Hilton was able to establish use of its trademark in association with 'hotel services' even without a physical hotel in Canada, and the trademark was able to remain registered. Hospitality businesses based outside of Canada that do not have bricks and mortar locations in the country may find this recent decision welcoming in respect of the law on trademark use in Canada.

On 17 June 2019, various amendments to the Trademarks Act came into force to align Canada's trademark regime with international standards set out in the Singapore Treaty, the Madrid Protocol and the Nice Agreement. These amendments expand trademark protection to include a broader array of novel signs, namely, letters, colours, holograms, sounds, scents, tastes and textures. The amendments effectively remove the requirement for an applicant to have made 'use' of a trademark in Canada or elsewhere before obtaining a registration. While the amendments have removed the requirement of 'use' as a prerequisite for trademark registration, the Trademarks Act now includes provisions enabling cancellation of applications or expungement of registrations that were made in bad faith (e.g., by trademark squatters).

ii Copyright

Canada's Copyright Act gives the rights holder the exclusive right to produce or reproduce a work or a substantial part of that work in any form. The types of works protectable under copyright law include literary, artistic, dramatic or musical works (including computer programs) and other subject-matter known as performer's performances, sound recordings and communication signals. Within the context of branding in the hospitality sector, copyright subsists in brochures, websites, and other promotional publications. Additionally, logos and other visual indicators of the source of goods and services (i.e., the visual appearance of a product design), while already protectable under trademark law, may also be protected under copyright law in respect of their design elements.

Businesses in the hospitality sector often rely on the use of music, such as background music, within their premises to create a desired atmosphere that aligns with their brand. Since musical works are protected by copyright, playing such works in any public space requires a suitable commercial-use licence. Failure to obtain a suitable licence to play such copyright-protected music may expose the user of the music to copyright infringement risks. In Canada, businesses that desire to play background music in their public spaces may obtain a suitable commercial-use licence from copyright collectives or organisations such as the Society of Composers, Authors and Music Publishers of Canada (SOCAN) or Re:Sound. Tariffs (i.e., licensing fees) payable to these organisations are set by the Copyright Board of Canada and depend on a number of factors including the size of the venue, the type of venue and the nature of the use. Local counsel may be able to assist in determining the type of licence required and an estimate of the tariffs payable to the licensor.

iii Domain names

With respect to website domain names, in Canada, the .ca domain name is administered by the Canadian Internet Registration Authority (CIRA). CIRA certifies domain name registrars. These registrars receive applications for domain name registrations directly from registrants and then funnel them up to CIRA, which ultimately approves and registers them.

CIRA requires registrants to meet Canadian presence requirements, which are designed to ensure that the .ca domain remains a 'key public resource for the social and economic development of all Canadians'. Hotel operators typically meet the Canadian presence requirements by creating a Canadian corporation or registering a trademark in Canada that corresponds to the desired domain name, both of which will satisfy the requirements.

Hotel operators should be wary of cybersquatters (and typosquatters), who register domain names broadly for the purposes of making it difficult (and costly) for companies to acquire domain names with their company names (or names close to their company names) in them. Many tools are at the disposal of hotel operators to fight back against cybersquatters, including a variety of carrot-and-stick strategies, such as filing a cybersquatting complaint under the CIRA domain name dispute resolution policy, initiating a trademark infringement action, and approaching the current registrant with an offer to acquire the domain name at cost (namely, the cost of acquiring and maintaining the registration).

Forcing a cybersquatter to relinquish a coveted domain name can be time consuming if the cybersquatter is not motivated for a quick transfer. Accordingly, an 'all-fronts' carrot-and-stick approach using all available levers at once may be the most effective strategy.

Data and hotel tech

i Collection, use and disclosure of personal information

Businesses engaged in commercial, for-profit activity in Canada are subject to privacy legislation that regulates the collection, use and disclosure of personal information. Data will constitute personal information when it can be used to identify an individual, whether on its own or in combination with other pieces of data. Personal information can include 'indirect' or 'inferred' information, such as a customer's spending patterns or travel habits, and can be in any format, including voice recordings and video surveillance records.

There are several laws in Canada that relate to privacy rights and the collection, use, and disclosure of personal information. By default the handling of personal information by hotels is governed by the Personal Information Protection and Electronic Documents Act (PIPEDA), a federal act enforced by the Office of the Privacy Commissioner of Canada (OPC). However, PIPEDA will not apply where a province has enacted privacy legislation that is deemed substantially similar to PIPEDA, in which case the province's legislation will apply instead of PIPEDA for actions that take place entirely within its borders (with some exceptions). This is the case in British Columbia, Alberta and Quebec.

PIPEDA compliance will likely be a hotel operator's first step in adapting their privacy framework to Canada, but provincial laws may apply. In particular, provincial legislation will apply in British Columbia, Alberta, and Quebec to employee personal information and to information collected, used and disclosed solely in those jurisdictions.

Before an organisation can collect, use or disclose an individual's personal information, the organisation needs the individual's consent or a statutory exception to the consent requirement. Consent can be express or implied. Express consent involves a positive affirmation or acceptance and may be required for sensitive personal information (such as medical or financial information or large volumes of non-sensitive information) or the collection, use and disclosure outside of the reasonable expectations of the individual. Implied consent may be sufficient for non-sensitive personal information (such as a mailing address). Consent of an individual is only valid if it is reasonable to expect that an individual to whom the organisation's activities are directed would understand the nature, purpose and consequences of the collection, use or disclosure of the personal information to which they are consenting. Owners, operators, franchisees or franchisors will need to be particularly sensitive to obtaining consent that is sufficiently broad to permit sharing within the organisation.

Another challenge for the hotel industry arises from the storing or accessing of personal information of Canadian residents from outside of Canada. Alberta's privacy legislation requires that organisations notify individuals if they transfer personal information to a service provider located outside Canada. Quebec's privacy legislation requires organisations to take all reasonable steps to ensure that personal information that is transferred cross-border for processing will not be used for new purposes or communicated to third parties without the consent of the individuals concerned.

Federally, the OPC has previously treated transfer of personal information to service providers located outside Canada as use of personal information, not as disclosure of personal information. This has meant that separate consent for the transfer is not required, though the OPC has stated that under PIPEDA's 'openness' principles notice of such transfers should be provided to affected individuals along with the risk of access by foreign governments and law enforcement.

Another recent development in Canada is mandatory breach notification. When an organisation experiences a breach of security safeguards involving personal information, PIPEDA requires organisations to take specific actions. All breaches will trigger the requirement to retain records of the breach for a period of 24 months. Breaches that create a real risk of significant harm will trigger obligations to report the breach to the Privacy Commissioner and notify the affected individual(s) and any organisations that 'may be able to reduce the risk of harm that could result from [the breach] or mitigate that harm', which could include law enforcement. The definition of significant harm is broad and includes 'bodily harm, humiliation, damage to reputation or relationships, loss of employment, business or professional opportunities, financial loss, identity theft, negative effects on the credit record and damage to or loss of property'.

Practically, each organisation that collects, uses or discloses personal information in Canada will need:

  1. a guest or consumer-facing privacy notice that explains the organisation's practices and includes other relevant information, such as where consumers can direct questions or concerns;
  2. internal privacy compliance policies and processes;
  3. an individual within the organisation who is responsible for the organisation's compliance (i.e., a privacy officer);
  4. 'data mapping', which is a detailed understanding of how the organisation collects, uses, shares and discloses personal information, including when it is shared with service providers;
  5. the development and testing of an incident response plan in order to prepare for a data breach; and
  6. a standardised approach to dealing with third parties who may have access to the personal information for which the organisation is responsible.

ii Doing business online

Various legislative initiatives have provided more legal certainty to doing business online. In Ontario, for example, the Consumer Protection Act 2002 (CPA) overhauled various existing consumer protection legal regimes and brought them under one roof for consistency and ease of administration. Some important extensions of the law favour consumers. These extensions are particularly germane to online commerce, where a growing number of Canadian consumers buy and sell goods and services, though they apply generally outside e-commerce as well. The creation of a new implied warranty, for example, requires that services supplied under a consumer agreement be of 'a reasonably acceptable quality'.

Another important change is a provision that invalidates any requirement in a consumer contract compelling disputes to be submitted to arbitration. This is designed to counteract the practice of some merchants to provide arbitration as the contractually stipulated dispute resolution mechanism in order to avoid a class action scenario.

Further, the CPA requires the merchant to provide the consumer with a fairly extensive list of disclosure information before concluding an internet agreement. The CPA also requires that this information be disclosed to the prospective consumer in a manner that is 'clear, comprehensible and prominent', as well as 'accessible'. In addition, a confirmation screen that summarises the consumer's purchase details just before the conclusion of the online purchase is mandatory, along with the requirement that the merchant provide a copy of the internet agreement to the consumer within 15 days after the consumer enters into that agreement.

iii E-commerce

Canadian provinces have adopted electronic commerce statutes that address a variety of issues that arise in doing business electronically, such as the validity of using electronic messages to meet the writing requirements for legal documents. Ontario's Electronic Commerce Act, for example, provides that the legal requirement for a document to be in writing is satisfied by a document that is in electronic form – such as email – if it is accessible so as to be usable for subsequent reference. The provincial electronic commerce statutes also stipulate that one can satisfy any legal requirement that a document be signed by an electronic signature. For example in Ontario, the definition of 'electronic signature' is very broad and encompasses any electronic information that a person creates or adopts to sign a document and that is in, attached to or associated with the document. In addition to writing and signature rules, most provincial electronic commerce statutes provide that an offer, an acceptance or any other matter material to the formation or operation of a contract may be expressed by electronic information or by an act intended to result in electronic communication, such as touching or clicking an appropriate icon or other place on a computer screen or even by speaking. These rules are useful because they confirm that contracts made over the internet will not be unenforceable simply because they were concluded electronically.

iv Anti-spam

The federal government enacted Canada's Anti-Spam Act (CASL) in December 2010. CASL came into force in 2014. It is widely considered to be one of the most stringent anti-spam laws in the world. The legislation implements a broad range of requirements intended to reduce spam, identity theft, phishing and spyware. Unlike the US CAN-SPAM Act, which allows businesses to send commercial electronic messages to individuals without prior consent so long as the message contains a valid unsubscribe mechanism, CASL requires businesses to obtain valid consent prior to sending even the first commercial message to intended recipients. Violations of CASL may be subject to administrative monetary penalties of up to C$1 million for individuals and C$10 million for other offenders.

Franchising of hotels

In Canada, each province has jurisdiction to regulate franchising. To date, six provinces have adopted franchise legislation: Alberta, British Columbia, Manitoba, Ontario, New Brunswick and Prince Edward Island (the Statutory Provinces). While there are subtle and important differences between the Statutory Provinces, the franchise legislation in each of the provinces is focused on pre-sale disclosure.

Depending on the nature of a particular distributorship or dealership, it may fall within the definition of 'franchise' in the pre-sale franchise disclosure legislation in force in the Statutory Provinces.

There is also common law that governs franchises in Canada. For example, a number of courts in Canada have ruled that because distribution relationships require mutual trust between the parties, either party may terminate a distribution agreement by giving reasonable notice to the other party in the event of a breakdown in that trust. To enforce this common law right in court, the terminating party would normally need to put forward evidence to demonstrate that the relationship of trust between the parties is broken.

There is also a line of case law dealing with claims brought by customers and other third parties who claim that a franchisor or manufacturer is legally responsible for the acts of its dealers, distributors or franchisees. While it is rare in Canada for a franchisee to be treated as an 'agent' of its franchisor (and franchise agreements will normally disclaim an agency relationship), the case law has developed a principle known as apparent authority (also referred to as agency by estoppel). Under this principle, where a franchisor causes third parties who transact with franchisees to reasonably believe they are transacting with the franchisor, the franchisor may be directly liable to the third party. To mitigate the risk of this outcome, franchise agreements or operations manuals in Canada would normally require franchisees to identify themselves as being owned and operated independently from the franchisor.

Under Canadian law, subject to pre-sale disclosure legislation in the Statutory Provinces, a franchise agreement is governed by general contract law principles. To be enforceable, a franchise agreement must meet the normal requirements for the enforceability of commercial agreements.

In Canada, franchise agreements typically grant a franchisee the right to operate the business using the franchisor's trademarks and system standards, at a particular location and/or within a particular territory, for a specified period. The right to use the franchisor's system usually includes the right to access the franchisor's confidential operations manual.

Although practice varies by industry, many franchisors will grant the franchisee some form of limited exclusivity, traditionally restricted to a reasonable geographic scope and for the duration of the franchise agreement's term. However, some franchisors provide no exclusivity.

Where broader exclusivity is granted, franchisors will typically restrict the protection to the same type of outlet being operated by the franchisee and will reserve for themselves the right to other types of outlets, such as non-traditional locations or the right to distribute branded products and services through non-traditional channels (for example, e-commerce and telephone sales).

In practice, exclusive territories rarely raise competition law issues, although the growth of e-commerce and omnichannel distribution networks may see a narrowing of rights traditionally reserved to the franchisor and territorial encroachment claims against franchisors.

The term of a franchise agreement will vary depending on the type of business and industry at issue and the amount of initial investment required by the franchisee. It is common to include test period provisions in master franchise and area franchise agreements, but less so in unit franchise agreements. In unit agreements a notional test period is commonly incorporated through the training programme offered to new franchisees. The franchisor reserves the right to terminate the grant or require the franchisee to complete additional training, as necessary, if the franchisee fails to complete the initial training programme (that is, the notional test period) to the franchisor's satisfaction.

Most franchise agreements include renewal rights. It is common for franchise agreements to provide the franchisee with a specified number of renewal options, which can only be exercised by satisfying certain express conditions.

The number and length of the renewal options varies by industry, but a common formula is an initial term of 10 years, with two renewal options of five years each. The franchise agreement may provide for payment of a renewal fee as a condition of renewal, however, in practice, franchisors may waive or reduce the fee. Other common renewal conditions include:

  1. notifying the franchisor of the intention to renew within the designated time period;
  2. having substantially observed and performed all obligations under the franchise agreement and any other agreement signed with the franchisor;
  3. ensuring the remaining term of the lease for the premises is at least as long any renewal term granted;
  4. renovating the premises;
  5. entering into the franchisor's then-current form of franchise agreement; and
  6. signing a general release of claims against the franchisor (although this requirement is unenforceable in the Statutory Provinces unless statutory claims are exempt from the release).

Hotel management agreements

As is noted above, larger international brands active in the Canadian marketplace moved towards the use of hotel management and franchise agreements many years ago to better allocate operational risks that would be essentially passed through to the brand if a hotel lease structure is used instead.

Hotel management agreements (HMA) are governed by provincial legislation applicable to the location of the hotel, as well as by federal legislation. They are usually entered into at the same time as other agreements relevant to the business, including service agreements and intellectual property agreements (such as licensing and confidentiality).

The term of an HMA is typically fixed with options for renewal. The renewal mechanism may be a set schedule of possible renewals or could be automatic until one of the parties to the HMA gives notice. To address risks, there are typically contractual exit options set out in the HMA addressing circumstances such as defaults on payments, the failure to meet certain objective measures or thresholds for financial performance or insolvency.

The covid-19 pandemic has created significant upheaval in the hotel industry and caused owners and managers to focus on HMA provisions often previously overlooked, in particular force majeure provisions. Force majeure provisions in HMAs vary widely, but typically termination rights only arise when a party has been prevented from performing an obligation for a significant period of time (e.g., 180 days), and accordingly as of this writing it seems unlikely that many HMAs will be terminated as a result of force majeure. If a hotel closed for some period due to covid-19 this would impact on fees payable to the manager, which are typically based on gross revenue earned. Finally, HMAs often include performance tests that permit an owner to terminate if financial performance falls below a specified threshold. Although this may create issues for a manager given the impact of covid-19 on hotel performance, these tests are often made by reference to competitor hotels in the area. Accordingly, if all hotels in the competitive set also experienced a decline in financial performance, there would be no underperformance for the hotel.

In most HMAs in Canada, the fee structure starts with a management fee based on a percentage of gross operating revenue, with provisions for additional incentive management fees tied to the hotel's financial performance. The owner will typically be the party responsible for paying the majority of the costs and taxes.

The flexibility afforded to the parties in drafting an HMA means that the terms included in HMAs may vary widely depending on what the parties wish to include. That being said, with larger brands the typical starting place for the HMA is the brand's template form of agreement. Given the brand's intimate familiarity with their own form and the complexity of many HMAs, prudent owners should take care when settling these agreements. HMAs will typically contain provisions regarding, among other things, the agreed standards for the quality and maintenance of the physical space, operations and guest service levels to ensure the hotel will align with others operated under the same brand.

Financing

Real estate financing for hotels can be structured in a variety of ways, including:

  1. conventional mortgage lending;
  2. public and private capital market financing;
  3. portfolio loans;
  4. acquisition financing;
  5. permanent financing;
  6. public and private bond financings;
  7. syndications;
  8. restructurings; and
  9. securitisation.

Banks, pension funds, credit unions, trust companies and other entities all arrange such financing on credit terms that vary on the basis of the transaction itself and the risks involved.

There are various instruments used to take primary security over real property in Canada, such as a mortgage or charge, a debenture containing a fixed charge on real property and trust deeds securing mortgage bonds (where more than one lender is involved). Additional security usually includes assignments of rents, leases and other contracts, guarantees and general security agreements.

Employment law

Employment in Canada is a heavily regulated area governed by either federal or provincial legislation. The majority of hotel employers are covered by provincial legislation.

i Employment standards

All jurisdictions in Canada have enacted legislation that establishes certain minimum employment standards. Generally, employment standards acts (ESAs) are broad and apply to employment contracts, whether oral or written. The standards defined in the ESAs are minimum standards only, and employers are prohibited from contracting out of or otherwise circumventing the established minimum standards. These laws spell out which classes of employees are covered by each minimum standard and which classes of employees are excluded.

Although standards vary across jurisdictions, many topics covered are common to all ESAs, including minimum wages, maximum hours of work, overtime hours and wages, rest and meal periods, statutory holidays, vacation periods and vacation pay, layoff, termination and severance pay and leaves of absence. The leaves of absence protected by ESAs vary across provinces, but may include sick leave, bereavement leave, maternity/paternity/parental/adoption leave, reservist leave, compassionate care/family medical leave, organ donor leave, family responsibility leave and crime-related death and disappearance leave.

Generally, employers must provide the required notice of termination, unless they have just and sufficient cause (Cause) to terminate an employee without notice. The length of the required notice period varies among jurisdictions, but generally increases with an employee's length of service. In Alberta, for example, employees with a minimum of three months of service are generally entitled to at least one week's notice of termination, with a maximum eight-week notice period for employees with 10 or more years of service. Employers are required either to give 'working notice' of an employee's job termination or provide pay in lieu of notice.

An employer is not required to give notice or pay in lieu of notice if the termination is for Cause. Cause is a high standard and includes, for example, wilful misconduct or serious disobedience.

Some jurisdictions provide for severance pay as an additional benefit to employees. For example, under the federal rules, all employees who have been employed for 12 consecutive months are entitled to severance pay equal to the greater of: five days of regular pay or two days of regular pay for each completed year of service.

In addition to minimum statutory termination and severance pay entitlements, a terminated non-union employee may be entitled by common law (or civil law in Québec) to additional notice of termination or pay in lieu of notice. This right may be enforced before the courts. The amount of notice will depend on the employee's individual circumstances, including length of service, age, the type of position held and the prospect for future employment. In most jurisdictions, an employer can limit its liability to the statutory minimum in an employment contract. Employers who wish to avoid or limit liability for common law pay in lieu of notice should therefore have clear terms in written contracts. The manner in which an employer treats an employee at the time of dismissal is also important, because an employer may be liable to compensate an employee for any actual damages caused by tortious conduct.

ii Unionisation

Further, each province has enacted legislation governing the formation and selection of unions and their collective bargaining procedures. In general, where a majority of workers in an appropriate bargaining unit are in favour of a union, that union will be certified as the representative of that unit of employees. An employer must negotiate in good faith with a certified union to reach a collective agreement. Failure to do so may result in penalties being imposed. Most workers are entitled to strike if collective bargaining negotiations between the union and the employer do not result in an agreement; however, workers may not strike during the term of a collective agreement.

iii Employee benefits

The Canada Pension Plan is a federal plan that provides pensions for employees, as well as survivors' benefits for widows and widowers and for any dependent children of a deceased employee. All employees and employers, other than those in the Province of Québec, must contribute to the Canada Pension Plan. The employer's contribution is deductible by the employer for income tax purposes. Québec has a similar pension plan that requires contributions by employers and employees within Québec.

In addition to the Canada Pension Plan, both employees and employers must contribute to the federal Employment Insurance Plan, which provides benefits to insured employees when they cease to be employed, when they take a maternity or parental leave and in certain other circumstances. The employer's contribution is deductible for income tax purposes. Québec also has its own Parental Insurance Plan, which provides benefits to insured employees when they take a maternity or parental leave and to which both employers and employees in Québec contribute. All provinces provide comprehensive schemes for health insurance. These plans provide for medically necessary treatment, including the cost of physicians and hospital stays. They do not replace private disability or life insurance coverage.

Funding of public health insurance varies from one provincial plan to another. In some provinces, employers are required to pay premiums or health insurance taxes. In other provinces, individuals pay premiums or the entire cost of health insurance is paid out of general tax revenues.

Employers commonly also provide supplemental health insurance benefits through private insurance plans to cover health benefits not covered by the public health insurance plan.

Employers may be required to provide sick or injured worker benefits in the form of workers' compensation, a liability and disability insurance system that protects employers and employees in Canada from the impact of work-related injuries. This benefit compensates injured workers for lost income, healthcare and other costs related to their injury. Workers' compensation also protects employers from being sued by their workers if they are injured on the job.

iv Health and Safety

The federal government and all provincial jurisdictions have enacted laws designed to ensure worker health and safety, as well as to provide compensation in cases of industrial accident or disease. Employers must set up and monitor appropriate health and safety programmes.

The purpose of occupational health and safety legislation is to protect the safety, health and welfare of employees, as well as the safety, health and welfare of non-employees entering work sites. In most jurisdictions, occupational health and safety legislation requires a workplace violence and harassment policy, as well as other safety-related workplace policies and programmes.

Occupational health and safety officers have the power to inspect workplaces. Should they find that work is being carried out in an unsafe manner or that a workplace is unsafe, they have the power to order the situation to be rectified and to make 'stop-work' orders if necessary. Contraventions of the acts, codes or regulations are treated seriously, and may result in fines or imprisonment. Recent changes to Canada's Criminal Code have also increased potential employer liability for failing to ensure safe workplaces.

Dispute resolution and management

In Canada, the judiciary is separate from and independent of the executive and legislative branches of government. Canada has provincial trial courts, provincial superior courts, provincial appellate courts, federal courts and a Supreme Court. Judges are appointed by the federal or provincial and territorial governments, depending on the level of the court.

The superior courts of each province and territory try the most serious criminal cases, as well as private disputes exceeding the monetary ceiling of the small claims divisions of the provincial courts. In the Toronto Region of the Province of Ontario, the Superior Court of Justice maintains a Commercial List. Established in 1991, the Commercial List hears certain applications and motions in the Toronto Region involving a wide range of business disputes. It operates as a specialised commercial court that hears matters involving shareholder disputes, securities litigation, corporate restructuring, receiverships and other commercial disputes. Matters on the Commercial List are subject to special case management and other procedures designed to expedite the hearing and determination of complex commercial proceedings. In addition, judges on the Commercial List are experienced in commercial and insolvency matters.

Each province and territory has an appellate court that hears appeals from decisions of the superior courts and the provincial and territorial courts.

The Federal Court of Canada has limited jurisdiction. Its jurisdiction includes inter-provincial and federal-provincial disputes, intellectual property proceedings, citizenship appeals, Competition Act cases, and cases involving Crown corporations or departments or the government of Canada. The Federal Court, Trial Division hears decisions at first instance. Appeals are heard by the Federal Court of Appeal.

The Supreme Court of Canada is the final court of appeal from all other Canadian courts. It hears appeals from the appellate courts in each province and from the Federal Court of Appeal. The Supreme Court of Canada has jurisdiction over disputes in all areas of the law. In most cases, leave to appeal must first be obtained. Leave to appeal to the Supreme Court of Canada may be granted in cases involving an issue of public importance or an important issue of law.

i Class actions

Class proceedings are procedural mechanisms designed to facilitate and regulate the assertion of group claims. Almost all Canadian provinces have class proceedings legislation. In provinces without such legislation, representative actions may be brought at common law.

Generally, the bar for certification in Canada is lower than in the United States.

Class actions may involve allegations of misrepresentation, breaches of consumer and employment laws, competition law (e.g., antitrust) breaches, securities fraud and breaches of public law.

Class actions are becoming an increasingly prominent aspect of business litigation in Canada. Businesses may benefit from the fact that individual damage awards tend to be lower in Canada than in the United States. In addition, the availability of punitive damages is limited in Canada.

ii Alternative dispute resolution

Alternative Dispute Resolution (ADR) refers to the various methods by which disputes are resolved outside the courtroom. Such methods include mediation (an independent third party is brought in to mediate a dispute) and arbitration (the dispute is referred to a third party for a binding decision).

In Ontario, the Rules of Civil Procedure mandate mediation in civil cases commenced in Toronto, Windsor and Ottawa. Mediation remains common in other parts of Ontario, and parties to a dispute will often agree to non-binding mediation by mutually selecting a mediator. Arbitration may be pursued on an ad hoc basis under a structure provided for in the local jurisdiction or under local statutory provisions.

iii Electronic discovery

The discovery and production of electronically stored information, commonly called e-discovery, has become an increasingly significant issue in litigation across Canada. A national committee has produced the Sedona Canada Principles to establish national guidelines for electronic discovery. The parties are required to consult and have regard to the Sedona Canada Principles when preparing their discovery plan.

The following principles are among the most significant recommendations of Sedona Canada:

  1. Once litigation is reasonably anticipated, the parties must consider their obligations to take reasonable and good-faith steps to preserve potentially relevant electronic information.
  2. As early as possible in the litigation, the parties should meet and confer regarding e-discovery issues, and should agree upon the format in which electronically stored information will be produced.
  3. In any proceedings, the parties should ensure that the steps taken in the e-discovery process are proportionate to the nature of the case and the significance of the electronic evidence in the case.

Outlook

Canada's hotel industry has grown substantially in recent years. Prior to the covid-19 pandemic, the trend was expected to continue, with many forecasters predicting that the Canadian hotel industry would experience continued growth in investment by both Canadian and foreign investors, construction of new hotel properties, occupancy rates, revenue and employment. The hotel industry has experienced significant upheaval since the start of the covid-19 pandemic and its road to recovery will be dependent on many factors, including but not limited to the lifting of travel restrictions, the ability of hotels to manage distancing and other public health requirements, and the rate of broader economic recovery.

Businesses seeking to establish, acquire, manage or invest in a hotel in Canada will be faced with a number of business and legal considerations that are unique to Canada. Although this chapter highlights the areas of law in Canada that are most likely to impact business decisions, it does not serve as an exhaustive analysis of all provisions of Canadian law with which businesses in the hotel industry must comply.

Footnotes

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