Report Topics:
1:- General Information
2:- Cooling-off Period
3:- Pyramid Schemes
4:- Multi-Level Marketing
5:- Prohibition on Products
6:- Credit Restrictions Country
7:- Money Collections
8:- Licenses
9:- Status of Direct Sellers
10:- Earnings Claims
11:- Taxes and Fees
12:- Social Security
13:- Others
General Information
Federal and Provincial/Territorial Law
Direct Selling in Canada is governed mainly by the different legislation of the ten (10) Canadian provinces and three (3) territories. Certain aspects are regulated by Canadian federal law.
Cooling-off Period
The cooling-off period for direct selling is governed by provincial/territorial legislation. In 1996, the provincial and territorial governments agreed to harmonize their cooling-off periods. The provinces and territories also harmonized the requirements for the contents of written sales contracts/invoices. All provinces/territories now have a ten (10) day cooling-off period. Information on individual provincial and territorial law is available to DSA members from the DSA office. All provinces/territories provide for cancellation after longer periods if certain other conditions are not met. A notice of rescission or cancellation is sufficient if, however it is expressed, it indicates the intention of the buyer to rescind the contract. The effect of the cancellation is to unwind the sales contract or withdraw an offer to buy as if the contract or offer never existed. It cancels any related sale, trade-in or any guarantee, or security of money payable given by the buyer or guarantor under the sales contract.
Pyramid Schemes
The federal and some provincial governments have established legislation to regulate pyramid schemes. Generally, a pyramid scheme is a scheme for the distribution of goods or services in which a person pays a fee to acquire the right to distribute the goods or services and, at the same time, acquires the right or obligation to recruit further participants to the scheme, for the recruitment of whom, and on the basis of whose sales performance the person receives commission, fees or other benefits.Pyramid selling is prohibited in all jurisdictions of Canada. The federal act which prohibits pyramid sales is the Competition Act, R.S.C. 1985, as amended.
Multi-Level Marketing
Multi-level marketing companies are legislated federally by the Multi-Level Marketing and Pyramid Selling provisions of the Competition Act, Section 55, 1985. Under the amendments to the Act of 1992, a ‘multi-level marketing plan’ means: a plan for the supply of a product whereby a participant in the plan receives compensation for the supply of the product to another participant in the plan who, in turn, receives compensation for the supply of the same or another product to other participants in the plan. The revised Section 55 contains measures directed against deceptive practices sometimes found in multi-level marketing plans, including but not limited to:
the exaggeration of earning potential by disclosing non-representative compensation earned by participants;
compensation for recruitment;
inventory loading (products sold to recruits in commercially unreasonable amounts);
required purchases as a condition of participation in a plan;
failure to provide participants with a right to return a product on reasonable commercial terms.
Multi-level marketing companies may apply for an advisory opinion from the Competition Bureau if they wish to have their marketing plan reviewed prior to commencing business in Canada. Contact Innovation, Science and Economic Development Canada, formerly, Industry Canada, for more information. Alberta, Saskatchewan, Manitoba and Nova Scotia require multi-level marketing companies to provide a copy of an advisory opinion with their direct sale license application. Consult with these provinces prior to applying for a license.
Prohibition on Products
There are generally no prohibitions on the sale of any consumer product by direct sellers. However, in March 2018, the Ontario Consumer Protection Act was revised to prohibit the direct sale of certain prescribed household appliances such as water heaters and air conditioners unless the consumer made the first contact. Alberta enacted similar legislation in 2017. Certain regulated industries have requirements that apply regardless of the distribution method and do not discriminate against direct sellers per se (e.g., wine, liquor, drugs, securities, insurance, etc.). The DSA does prohibit companies selling products that are illegal in certain provinces/territories from being admitted into membership.
Credit Restrictions
Those direct sellers who are involved in extending credit usually have high individual average sale prices of products such as large household appliances. Methods vary from the use of conditional sales agreements to revolving credit, which is also known as variable credit. Direct sellers who use conditional sales agreements should be aware not only of the cost of credit disclosure requirements but also the various sales acts of the provinces and territories and their registration requirements.
Whatever method is used, the consumer protection laws of all the provinces and territories require that the consumer be completely aware of the cost of credit that is extended to him/her. In this regard, the phrase ‘cost of borrowing’ is used in most of the ten (10) provinces and three (3) territories.
When credit is extended for the sale of goods or services, assuming that payments are made when they become due, the cost of borrowing means the amount by which the total sum the buyer is required to pay exceeds the cash price of the goods or services plus any insurance or official fees payable by the seller at the buyer’s request minus any sum credited as a down payment or trade-in.
The cost of borrowing must be expressed both as one sum in dollars and cents and as an annual percentage rate. A direct seller who extends credit other than variable credit in the course of a sale of goods or services, must provide the buyer with a written statement specifying information required under the applicable legislation.
All provinces and territories regulate the advertisement of the cost of borrowing. A seller is not permitted to advertise its charge in any manner unless the advertisement includes the cost of borrowing expressed as an annual percentage rate.
Money Collections
There are no regulations with respect to the collection of money and deposits except in British Columbia. Direct sellers are free to collect any payments or down payments. There is no limit to the amount of advanced payments. In British Columbia a direct sale is unenforceable if the direct seller requires a down payment that is more than $100 or 10% of the purchase price, whichever is less.
Licenses
All the provinces and territories, except British Columbia and Ontario, have legislation requiring the registration or licensing of direct sellers. Licensing is aimed at not only maintaining the standards of the direct selling industry but also at protecting the consumer. Most of the provinces and territories require that the fee for the licence or registration must be accompanied by the posting of a security bond, which may be forfeited in favour of disadvantaged consumers.
In each province and territory, direct sellers should examine the legislation and regulations to see if any of the exemptions from licensing apply to the class of goods or services that they are selling. They should also check municipal licensing requirements in addition to provincial/territorial requirements. Several provinces and territories require both the vendor and the salesperson to be licensed. In addition, some provinces, such as Alberta, Saskatchewan and Nova Scotia, require a salesperson to carry an identification card. There are some exceptions based on average retail sales of goods in some of the provinces.
When applying for a license, the applicant must pay the prescribed fee, fill in the requisite application form and post the bond if requested to do so. Failure to comply with these requirements can lead to fines and other penalties. The license continues in effect for one or two years depending on the province or territory.
Municipal licensing may also be necessary. Municipalities that do require licenses often have detailed and lengthy by-laws. Municipalities have different terms for direct sellers. The direct seller may be known as a hawker, peddler, canvasser, itinerant trader or transient trader. Additionally, there may be exemptions from licensing requirements for certain groups.
Status of Direct Sellers
In many direct sales companies, the legal relationship between the sales force and the direct seller can be defined as one of contractor status. Canadian court decisions over the years have employed various criteria to distinguish between employees and contractors. Recent decisions have developed a theory of both dependent contractors and independent contractors. Decisions are primarily based on how much control is exercised over the contractor. If the contractor has one predominant source of income and there is a standard form of contract they must sign, that leans more to the individual being considered a dependent contractor. The less control over the contractor that the direct seller exercises, the less likely they are to be considered a dependent contractor. The courts examine the total working relationship and asks, “Is the person in business on his/her own accord”? They take several factors into consideration. None of the following factors on their own are conclusive, but all contribute to the decision on whether a worker is an employee or a dependent or an independent contractor. Some of the criteria for a contractor relationship are:
No control over hours worked and no supervision over the manner in which the work is performed;
No entitlement to benefits;
Assumption of risk of loss;
Investment in facilities, equipment;
Selection of materials and tools for work;
Power to set the sale price of the products sold;
Method of payment;
Duration of time engaged to do the work.
Dependent or Independent contractors do not incur those obligations to which they would ordinarily be subject as employees. An employer/employee relationship triggers certain statutory responsibilities under both Federal legislation and provincial labour standards legislation such as:
Earnings Claims
Earnings claims in relation to a multi-level marketing (MLM) plan refer to claims made by a person with respect to earnings which a participant in the plan can expect to make. One is considered to be a participant in a plan if one is actually conducting activities necessary to realize the benefits of the plan. If a plan qualifies as a MLM plan, its operator and its participants are subject (among several other rules) to the rules of fair, reasonable and timely representations on compensation under the plan.
The Competition Act forbids operators or participants to make any representation relating to compensation under the plan to a prospective participant in the plan, unless “it constitutes or includes fair, reasonable and timely disclosure of information” with respect to:
MLM plans usually produce various levels of earnings for their participants. A typical participant is a person who receives a level of earnings which is the closest to the level of earnings received by the majority of participants. Where no single level of earnings accounts for the majority of participants, reference must be made to the fewest levels containing the largest number of participants which together, constitute a majority of the participants.
In the same manner, if the information provided by the company includes the highest figures earned by participants, then the operator must also disclose the proportion of participants at that dollar figure. The Competition Act contains criteria for disclosure of information, a ‘due diligence’ defense, a prohibition of compensation on recruitment and penalties on summary conviction or indictment.
Taxes and Fees
Federal Income Tax: The general rate of federal tax levied on taxable corporate income is 15%.
Provincial Income Tax: All provinces levy tax on corporate income allocated to a permanent establishment in the province. The general rate varies from 11.5 to 16% depending on the province in which it is located.
Goods and Services Tax: The GST is a 5% federal multi-stage value added tax, applied in each province and territory across Canada to the supplies of most goods and services. The tax does not apply to zero-rated supplies such as certain exports and basic groceries or to exempt supplies such as certain health care and financial services.
Harmonized Sales Tax: This 13%–15% tax applies in the provinces of Ontario, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland. The HST combines the federal GST and former provincial retail sales tax in one rate. The HST operates under the same basic rules as the GST with minor provincial differences. The Quebec QST is modelled on the GST at an effective combined rate of 15%.
Retail Sales Tax: The provinces of Saskatchewan, Manitoba and British Columbia also levy a retail sales tax at rates ranging from 6% to 7% on most purchases of goods for consumption or use in the province and on a limited range of services. Only the 5% federal GST applies in Alberta, the Northwest Territories, Yukon, and Nunavut as these jurisdictions impose no RST.
GST / HST and QST Alternate Collection Methods: Under Canadian Tax laws, Direct Selling businesses are able to register for an alternative tax collection regime which significantly simplifies the collection of GST/HST tax on the part of “sales representatives” or “distributors”. There are two regimes, called the “Network Sellers Method” (“NSM”) and the Direct Sellers Method “DSM”, which is often referred to as the “Alternative Collection Method” (“ACM”). The former applies to businesses which use “sales representatives” to arrange sales to the business’s customers. The latter applies to businesses which sell their products to “independent sales consultants” (termed “distributors”) who, in turn, re-sell the product at a mark-up to their own customers.
A special feature of the ACM is that the sale to the distributor is ignored and the GST/HST and QST is remitted by the direct seller based on suggested retail price of goods sold to consumers. Performance bonuses paid because of the volume of sales are not taxable for GST/HST or QST purposes, and the distributor does not pay GST/HST or QST on sales aids (e.g., samples, catalogues, and other promotional materials). Similar to the ACM, under the NSM qualifying performance bonuses and sales aids are also not taxable for GST/HST or QST purposes.
Approval from the Canada Revenue Agency is required before the ACM or NSM can be used. It is possible to be approved to use both methods. However, approval for the NSM can only be obtained prior to carrying on business or at the beginning of a new fiscal year.
Withholding Taxes: Withholding tax at prescribed rates applies to salaries, bonuses, commissions, etc., as well as to remuneration paid to non-resident employees. Withholding taxes do not apply to payments made to resident independent contractors but withholding applies in respect of services rendered in Canada by non-resident persons. Some direct selling companies, because of their services relationship with their independent contractors, must report payments made to independent contractors annually.
Social Security
Sales Contractor’s Status: Sales contractors are self-employed if they meet all of the following criteria:
Are engaged in the trade or business on their own account, of selling or soliciting the sale of consumer products, either
in a home or other place that is not a permanent retail establishment, or
to any buyer on a buy-sell basis, a deposit-commission basis, or any similar basis for resale by the buyer or any other person in a home or other place that is not a permanent retail establishment.
Substantially all the earnings (whether paid in cash or not) for services in (1) are directly related to sales or other output (including the performance of services) rather than to the number of hours worked and the contractor’s activities are not controlled by the direct seller organization.
The services are performed under a written contract between the contractor and the person for whom the services are performed, and the contract provides that the contractor is an independent contractor and will not be treated as an employee for federal tax or other purposes.
Social Security System: The federal, provincial, territorial and local governments participate in a comprehensive system of social security in Canada providing for income security and social service programs. Income security programs provide direct cash payments to eligible recipients.
Coverage: The Canada and Quebec Pension Plans cover almost all employed and self-employed members of the labour force between the ages of 18 and 70. All of the provinces and territories have statutes providing for compensation to workers and their dependents for injuries and occupational diseases arising out of and in the course of employment in certain industrial occupations. Employment insurance covers most workers (the majority of the Canadian workforce). As of 2011, self-employed persons, such as sales contractors, are eligible for special coverage. The provincial and territorial health and medical care programs generally cover residents only.
Contributions: Employee contributions in respect of the Canada Pension Plan (CPP), Employment Insurance (EI) and provincial/territorial health insurance are normally made via payroll deductions. No such deductions are made for independent contractors.
Others
PROVINCIAL/TERRITORIAL LEGISLATION
FEDERAL LEGISLATION
Canada Consumer Product Safety Act
The purpose of the Canada Consumer Product Safety Act (CCPSA) is to protect the public by addressing or preventing dangers to human health or safety that are posed by consumer products in Canada.
The CCPSA contains requirements for the manufacturing, importing, selling, advertising and testing of consumer products in Canada. Under the CCPSA, the Minister of Health (Health Canada) has the power to order recalls of products on the market that pose a danger to human health or safety.
A consumer product under the Act is a product that may reasonably be expected to be obtained by an individual to be used for non-commercial purposes, such as for domestic, recreational or sports purposes. This definition includes the product itself, the product’s components, parts, accessories and its packaging.
Under the CCPSA, selling a consumer product includes leasing the product or distributing the product to one or more persons even if there is no money or other consideration exchanged for the distribution.
Manufacturing a consumer product includes producing, formulating, repackaging and preparing it. It also includes reconditioning the product for sale.
The CCPSA does not apply to certain products that are covered by other legislation, such as: