Extended warranties or guarantees are not “insurance” for tax purposes: Alberta Appeal Court

Extended warranties or guarantees on products other than vehicles do not count as “insurance” for tax purposes, the Alberta Court of Appeal has ruled.
In Brick Protection Corporation v. Alberta (Provincial Treasurer), the Appeal Court concluded on July 21 that taking fees for extended warranties did not make a company liable to pay a tax on insurance companies.
The Brick Protection Corporation is a sister company of The Brick, a furniture, appliance and electronics retailer. The retailer no longer offers its own warranties to customers. Instead it offers consumers a guarantee of the goods given by its sister company, The Brick Protection, which does not sell such guarantees directly.
For the years 1987 to 1993, Alberta assessed The Brick Protection more than $700,000 in taxes (plus interest and penalties) on the theory that, by offering guarantees, it is engaged in the business of insurance and is therefore an insurance company.
Alberta Court of Appeal Justice J.E.L. Cote went through a number of legislative definitions of “insurance” and found the provincial Insurance Act was vague on the issue of whether extended warranties and guarantees fell under the definition.
He noted that “typically, insurance involves outside risks created neither by the insured nor the insurer.”
But “the guarantees in issue here are the opposite,” he continued. “They cover only product failure as a result of defects in materials or workmanship of the very item sold” by the sister company. In other words, the company itself is creating the risk to be guaranteed.
Also, Cote relied in part on the actions of the provincial insurance regulator – or more specifically, the lack of action by the regulator – as a guide of whether or not warranties or guarantees counted as “insurance” for tax purposes.
He said it was instructive The Brick Protection’s business “is neither registered nor licensed under [the Insurance Act], nor subject to its hundreds of regulatory and consumer protection sections.” And yet, he wrote, “the Superintendent of Insurance knows that it is not licensed, and has no plans to ask it or other warranty companies to get licensed.”
This suggests the Insurance Act is not intended to cover extended warranties or guarantees, the judge found.