Toronto Business and Technology Lawyer Sukhi Hansra compiled a list of questions to help determine if your SaaS startup idea is legal, and other important operational factors to consider before launching your business.
In 2020, Canada’s SaaS companies racked in combined revenue of $725m. It’s predicted the SaaS industry will grow globally to $185 billion by 2024 as the Fourth Industrial Revolution propels us further into an era defined by the internet of things. The growth of Canada’s tech industry will continue on an upward trajectory as the need for AI, cloud computing and other SaaS-based applications continues to rise.
With limitless opportunities, starting a SaaS company seems like a lucrative venture for many tech entrepreneurs. However, like any business, it’s not exempt from the law, which can be a tricky territory to navigate in the online sphere, especially between different provinces and countries.
For example, the New York-based facial recognition company Clearview AI was recently declared illegal by Canadian authorities for violating privacy laws. While the internet enables businesses to have a limitless global market reach, it also increases the legalities they need to adhere to.
To prevent costly lawsuits, here are 3 questions to help determine if your SaaS startup idea is legal, and other important operational factors to consider before launching your business.
Is my SaaS product/service legal in Canada, as well as in other territories I wish to operate in?
Whether it’s an e-commerce or a SaaS-based product, you should research and find out if it’s legal to sell your product/service in Canada. In most cases, if your product/service is prohibited from being sold in a brick-and-mortar store, the same will apply online. However, there are some loopholes.
For example, in Canada, you can only operate an online gambling site if you have a licence. Technically, however, there are no laws that explicitly address offshore gaming sites, whose services can still be marketed to Canadian or international clientele.
We use this example not to encourage the operation of shady SaaS businesses in grey areas, but rather to point out how finicky the law can be. Therefore, it’s critical to do thorough research and consult a business and technology lawyer to assess your business’s feasibility.
What are the SaaS startup data compliance and privacy laws?
Most SaaS businesses rely heavily on data. Data is often stored in multiple jurisdictions creating overlapping jurisdictions for Canadian-domiciled organizations. Any SaaS company has a responsibility to comply with Canadian privacy laws and privacy laws in other jurisdictions.
In Canada, all federally regulated and private sector businesses are subject to the federal Personal Information Protection and Electronic Documents Act (PIPEDA). They are allowed to process and stores personal information outside of Canada, provided there are legal and adequate safeguards in place, and notice of these safeguards has been provided.
Any Canadian company using the services of most cloud providers must pay particular attention to the jurisdictions where their data will be stored, and ensure clear and visible notice is given to their customers.
In Canada’s public sector, some provinces limit how personal data can be stored and accessed outside the country, requiring additional encryption. If you don’t adhere to data compliance laws, it could mean that while the goods and services your startup sells are legal, the way your company operates is not.
What are SaaS startup tax regulations?
The regulations regarding the taxation of digital products in Canada vary from region to region. A digital product is generally defined as anything a customer receives or accesses via the internet, including software, apps, SaaS or website subscriptions. All digital goods and services are taxed according to where your company is located and the province or country your customer lives in.
Nationwide, Canada has a federal Goods and Services Tax (GST) of 5%, which is applied to the sales of all goods and services. In other countries like the US, they refer to their sales tax as Value-added Tax (VAT). Some provinces in Canada also have a Provincial Sales Tax (PST), which varies between 7-10%. When PST and GST are combined, it’s referred to as Harmonized Sales Tax (HST).
The federal GST applies to digital services but only if the seller has a permanent establishment or physical presence within Canada, i.e. an office, agents or employees, a place of delivery and payment or a place where an inventory is stored.
The challenges around legalities in the SaaS industry are often less to do with the products themselves, and more to do with red tape regarding taxes, data protection and privacy, which prohibits the unethical use of personal or business data and prevents tax evasion.
These laws are essential to consider as they may affect where your head office is based, who your cloud provider is, how far-reaching your target market is and whether you employ workers all over the globe or only hire nationally. For many tech entrepreneurs, the legalities can be overwhelming, which is why we recommend using a business and technology lawyer to ensure your SaaS startup idea is legal and its operations abide by the law.
Toronto Business Lawyer
As a tech entrepreneur myself as well as a business and technology lawyer, I understand first-hand how failure to understand key legal issues impacting your SaaS can sink your business idea. To protect the future of your technology business, contact Sukhi Hansra to schedule a free consultation at (416) 580-0345.