Canada has a thriving MLM market with over 14 million Canadians involved with MLMs. At a population of only 40 million, that means roughly 35% of Canadians have had engagement with an MLM. It’s not hard to see why Canada has generated $3.4 billion in sales from MLMs.

WHAT COUNTS AS AN MLM OR PYRAMID SCHEME IN CANADIAN LAW?

In Canada operation of an MLM is legal, whereas the operation pyramid scheme is illegal, as is the case in other jurisdictions. There is one defining similarity between most jurisdictions as to what constitutes a pyramid scheme, which is making a profit by the recruitment of additional members instead of making a profit by the sale of a product. Canada, unlike many jurisdictions, has statutorily defined what a pyramid scheme is under section 55.1 of the Competition Act. Key in this provision, amongst other matters, are the following features, which, if triggered, will possibly result in your legitimate MLM being deemed a pyramid scheme. Your system requires:

Requires the participant to pay before they can receive compensation from recruitment;
Requires the participant to purchase things other than the product that is promoted;
Any leg requirements;
Binary, or hybrid compensation plans;

Includes inventory loading; or
Lacks a buy‑back guarantee, or participants are not informed about the guarantee.

CANADA REQUIRES FEDERAL AND PROVINCIAL LICENSING

Some jurisdictions do not require licenses to operate an MLM. Indeed, this is the case for the US, but not the case in Canada. Canada typically requires licensing on a federal and provincial level. Federal legislation typically requires that an MLM obtain a written opinion from the Competition Bureau. While not strictly a license, it essentially operates as one. The second set of licensing is provincial licensing. Almost all provinces will require an MLM to obtain a license before it can operate its business in a province.

DISCLOSURE REQUIREMENTS DO’S AND DON’TS

Under the Competition Act, both operators and participants of MLMs must make fair, reasonable, and timely disclosure to prospective participants. A common pitfall for MLMs is representations regarding the income achieved by participants. Disclosure in relation to income must be based on the results of typical participants. This means MLM businesses can only make representations regarding income based on more than 50% of their participants. It is the duty of the operator (i.e., corporate) to ensure that policies are in place and available to participants to avoid misleading disclosures. Furthermore, operators must have procedures in place to prevent and possibly discipline certain disclosures.

PRODUCTS AND ADVERTISING

Products in Canada are regulated by specific licensing and advertising category requirements. Categories include, but are not limited to, cosmetics, medical device, and wellness products. For instance, natural health products must have an NHP license granted by the Natural and Non-prescription Health Products Directorate/Health (NNHPD) Canada. Before a license is granted, the NNHPD will require detailed information regarding medicinal ingredients, potency, non-medicinal ingredients, etc. These may impact how your product can be labeled or advertised.

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IF YOUR COMPANY SHIPS NFR, YOUR COMPANY MAY STILL TRIGGER MLM LEGISLATION

There are many misconceptions as to what the rules and regulations regarding “NFR” in Canada are. “Not for resale” rules usually relate to either items that are for personal use or reference certain export rules around the importation of goods into Canada, followed by the export of those goods to a foreign country. Use of this rule as a “loophole” for MLMs is inadvisable, as it is likely that specific MLM laws or product legislation will be triggered. For example, if an MLM markets a natural health product (NHP) relying on personal use legislation, but a participant in the MLM seeks to market the product to others, it will most likely be in breach of not only personal use regulation but will also possibly be seen as operating an MLM in Canada without proper licensing.

LOOKING FOR GUIDANCE?

Is your business looking to launch in Canada? Or is your business already operating in Canada, and you are looking for guidance? Feel free to schedule a free consultation with MLM Canada.

UNDERSTANDING CANADIAN MLM LAW: WHAT U.S. AND INTERNATIONAL COMPANIES NEED TO KNOW