After 30 years specializing in tax for business owners across Ontario, I can tell you something that might surprise you: franchise owners often pay more tax than they should.

Not because they're doing anything wrong. Not because their accountants are incompetent. But because franchise accounting has unique complexities that most general practice accountants simply don't encounter often enough to spot the opportunities.

I've seen franchise owners in the $500K to $3M revenue range leave tens of thousands on the table each year. Money that should have stayed in their business - or their pockets - instead went to CRA because nobody was paying attention to the franchise-specific deductions and planning strategies available.

Let me walk you through the most common traps I see, and more importantly, how to avoid them.

The Franchise Fee Deduction Nobody Talks About

When you purchase a franchise, you pay an initial franchise fee. Could be $25,000, could be $100,000 or more depending on the brand. Most accountants will correctly tell you this is a capital expense - you can't just write it off in year one.

What they often miss is the eligible capital property treatment and the nuanced CPA rules around how franchise fees are actually categorized for tax purposes.

Here's where it gets interesting: portions of your franchise fee might actually qualify for different tax treatment depending on what they cover. If part of that fee is for training, initial inventory, or grand opening support, those components may have different deductibility timelines than the pure "right to operate under the brand name" component.

I recently reviewed a Tim Hortons franchisee's tax returns from their previous accountant. Over three years, they had overpaid by nearly $18,000 because nobody had properly analyzed the franchise agreement to break out these components. The fee had been lumped together and depreciated uniformly when better treatment was available.

Royalty Payments: Are You Categorizing Them Correctly?

Every franchise owner knows about royalty payments - typically 4-8% of gross sales paid monthly to the franchisor. What surprises people is that not all royalty payments are created equal for tax purposes.

Standard royalties paid for the right to use the brand, systems, and ongoing support are fully deductible business expenses. No issues there.

But here's the trap: many franchise agreements bundle other charges into what they call "royalties." Marketing fund contributions, technology fees, territory protection fees - these might all show up on your franchisor statement as one line item.

For tax purposes, you need to break these out. Some have different deductibility rules. Some might qualify for SR&ED credits if they fund innovation or technology development. Some might need to be capitalized rather than expensed.

I worked with a home services franchise owner last year who was paying $4,200 monthly in combined royalties and fees. When we analyzed the franchise agreement and monthly statements, we discovered that $900 of that was actually for proprietary software development the franchisor was doing. Because this franchisee's business was testing and refining that software in real-world conditions, we were able to claim SR&ED credits - something their previous accountant had never even considered.

That translated to over $15,000 in tax credits in the first year alone.

The Multi-Location Maze

If you operate multiple franchise locations, you're dealing with a whole different level of complexity. And most accountants who don't regularly work with franchises make the same mistakes here.

The big question: should each location be a separate legal entity, or should they all operate under one corporation?

There's no universal right answer - it depends on your situation, your growth plans, your risk tolerance, and your tax situation. But I see franchise owners locked into structures that cost them money every year because nobody did the proper analysis upfront.

For instance, I have a client with three quick-service restaurant franchises. When they came to me, all three were under a single corporation. Made bookkeeping simpler, sure. But it also meant they were hitting higher corporate tax brackets faster, couldn't take advantage of multiple small business deductions, and had unnecessary liability exposure.

We restructured into a holding company with separate operating companies for each location. The first-year tax savings covered our professional fees three times over. And they sleep better knowing that if one location faces a lawsuit, it doesn't jeopardize the others.

Conversely, I've seen franchise owners who were talked into overly complex structures they didn't need - paying for multiple corporate tax returns and dealing with inter-company accounting headaches when a simpler structure would have served them better.

The right structure depends on your specific situation. But you need an accountant who knows the questions to ask.

Inter-Location Transfers and the Inventory Headache

Speaking of multi-location operations: how are you handling inventory transfers between locations?

This seems like a simple bookkeeping issue. It's not. Get it wrong and you can create phantom income, trigger GST/HST problems, and end up paying tax on money you never actually made.

I see this constantly with franchise owners who are managing their own books or working with bookkeepers who don't understand franchise operations. They'll transfer $5,000 of inventory from Location A to Location B, record it as a "sale" at Location A and a "purchase" at Location B.

Congratulations - you just created taxable income where none exists and potentially triggered HST obligations on an internal transfer.

The correct treatment requires proper inter-company accounting if you're using separate entities, or proper location-based tracking if you're under one entity. You need to track inventory movement without creating false revenue. You need to maintain audit trails that CRA will accept. And you need to do it in a way that gives you meaningful financial data for each location.

Get this wrong and you'll discover the problem during a CRA audit - the most expensive way to learn accounting lessons.

The Overhead Allocation Nobody Does Right

Here's a question for you: how do you allocate your central overhead costs across multiple locations?

If you said "I don't," you're not alone. And you're leaving money on the table.

If you said "I split everything evenly," you're doing better, but you're still probably not optimizing.

Proper overhead allocation matters for several reasons. First, it gives you accurate profitability by location - essential for making smart business decisions. Second, it can affect your tax planning, especially if you're using separate legal entities. Third, franchisors often require it for their reporting.

I'm talking about costs like: your salary as owner-operator, your central office rent, your accounting fees, your insurance, your technology subscriptions. How much of that belongs to each location?

The answer depends on factors like revenue per location, square footage, employee count, transaction volume. There's no one-size-fits-all formula. But I can tell you that the franchise owners who get this right make better decisions and often find tax planning opportunities others miss.

What You Should Do Next?

If you're a franchise owner and you recognized yourself in any of these scenarios, it's time for a second look at your accounting setup.

You don't necessarily need to switch accountants. But you do need to work with someone who understands franchise operations, who's seen these situations before, and who knows how to structure your accounting to minimize taxes and maximize profitability.

Here at Côté and Associates, our team brings 150 years of combined accounting and tax experience to the table. We've worked with franchise owners across multiple brands and industries. We know the questions to ask. We know what franchisor reports you're dealing with. And we know how to turn your accounting from a compliance headache into a strategic advantage.

If you'd like to discuss your specific situation, reach out to our office. We can start with a straightforward review of your current structure and identify whether there are opportunities you're missing.

After 30 years focused on tax planning, I've learned this: the cost of good advice is always less than the cost of missed opportunities.

Ready to see what your franchise accounting is costing you? Contact Côté and Associates Professional Corporation to schedule a franchise accounting review. Our team's 150 years of combined experience serving business owners across Canada.