Expanding a business to a new country with an unfamiliar legal landscape can be a daunting task. Canada in particular, while generally a very business-friendly jurisdiction, is composed of 10 provinces, 3 territories, as well as federal laws that apply throughout the country. Certain regulatory matters, like healthcare, education, and securities, largely fall within the jurisdiction of each individual province, and other matters, such as interprovincial trade, banking, and telecommunications, fall under federal jurisdiction.
Because of this complexity, we’ve created this simple five-step guide to help you frame your approach to doing business in Canada.
Step 1: Determine what regulations apply to your business and assess the direction of “regulatory travel”
Most businesses assume that a local bank account or business entity is necessary for conducting business in a new jurisdiction. In Canada, that isn’t necessarily true. The key determinant of which rules apply almost always boils down to the type of business activities you carry on and where. That’s why its so important as a first step to assess your activities in light of the regulatory requirements in each jurisdiction you choose to operate. Sometimes, the main value add for undergoing this exercise may be to merely confirm whether your business activities require licensing or registration in Canada, or to gather information on trends in regulation that could eventually impact the development of your business in Canada. Is your industry likely to be subject to increased regulation moving forward? Is there a lot of movement in the space? Are there active government consultations? The goal here should be to develop not only your understanding of the current regulatory landscape, but to do some horizon scanning too. This insight into regulatory developments may be particularly important for businesses participating in emerging industries, such as crypto, payments, gaming, etc., where regulations may not yet address business activities.
Step 2: Does compliance require a license or registration?
In Canada, licensing or registration requirements can vary by jurisdiction. Therefore, while your business activities may subject you to regulatory requirements in every jurisdiction, you may not require regulatory approval in every jurisdiction to operate. For consumer lending businesses, for example, registration (or similar) requirements exist in Saskatchewan, Quebec, New Brunswick and Nova Scotia, whereas in the rest of Canada, there are regulatory obligations, but regulatory approval isn’t required to carry on business. Keeping up with regulatory requirements in each jurisdiction can be difficult, and successfully navigating the application process can be time consuming. Therefore, its important that businesses set expectations and budget for such expenditures.
Step 3: Assess your regulatory burden
The immediate reaction to regulatory capture, i.e. the applicability of certain laws, rules or regulations to your business activities, is often frustration…due to expectations of high compliance costs, red tape, inflexibility, the list goes on… However, regulatory capture isn’t necessarily a bad thing. For many businesses, particularly those operating in emerging industries and employing novel technologies, a clear regulatory framework can foster innovation by delineating clear lines between regulated and unregulated conduct. Regulatory certainty can also help reassure business partners and potential investors that there are no legal barriers to operating in a particular jurisdiction. Coordinating with experienced counsel, or directly with the relevant regulator, are two productive ways to identify associated requirements, timelines, and measures you may be required to take to comply in the jurisdiction(s) in which you choose to operate. In some cases, all that may be required to comply with regulatory requirements is simple restructuring of a product/service offering or preparation of disclosure materials to ensure that investors, customers, users, consumers – whoever your target audience is, is protected.
Step 4: Is there a way to structure your product to lighten the regulatory burden or avoid licensing/registration?
While regulatory clarity can be valuable, there are also times where regulatory capture can impose relatively heavy requirements on businesses that could make a business question the worthiness of a particular venture. We often see examples of this in the crypto space, where a start-up business wants to incorporate a token / cryptocurrency into its operations, and the token qualifies as a “security” under Canadian securities laws. Costs of registration as a securities dealer or marketplace can be very high, and while exemptions exist, the pursuit of an exemption can limit the flexibility of the business and derail project roadmaps. Under such circumstances, the best path forward can often be to revise the product/service offering or business model to avoid regulatory capture, while staying aligned with underlying business goals and objectives.
Step 5: What mechanisms do I need to have in place to demonstrate compliance?
Depending on the nature of business activities, and applicable regulatory requirements, you will likely need to put certain procedures in place to demonstrate compliance with those requirements. For example, for many online consumer-facing businesses, such mechanisms would include a privacy policy and terms of service that govern the use of the website and notify consumers of their rights, how the site works, and rules for access. For B2B models, contractual mechanisms will need to be in place to mitigate risk and address nuanced Canadian rules that can be industry specific and vary by province. For certain licensed entities, such as money service businesses, insurance companies, or soon to be payment service providers (when the Retail Payment Activities Act comes into effect) specific mechanisms may be set out in the applicable regulatory regime. For example, under the Proceeds of Crime (Money-Laundering) and Terrorist Financing Act, reporting entities are required to appoint a designated officer to oversee compliance activities, and implement a risk assessment framework and record keeping / reporting procedures for certain transactions or security incidents. Ultimately, the mechanisms required will depend on the nature of the business activities, and type of event or transaction that a regulator requires the business to address.
For most businesses, a huge part of the battle is in simply identifying what regulatory obligations apply to your business. Once identified, companies would be well served by adopting a “compliance by design” approach to product development and growth. Knowing your products are set up to comply with regulatory requirements frees the business to scale more efficiently, with an informed view of the regulatory guardrails that will shape their growth and innovation. In practice, this process means taking a proactive approach that integrates regulatory compliance throughout the product design process. For new businesses this approach can seem daunting and costly. The reality is that the cost of non-compliance can be much higher.
For assistance identifying regulatory obligations and organizing compliance by design, please reach out to Tracy Molino or Noah Walters, at Dentons Canada LLP.
