Vehicle warranties: Auto insurers don’t owe premium tax on dealer’s fees

An insurer doesn’t owe provincial premium tax on auto dealer’s fees charged for vehicle equipment warranties, the Supreme Court of B.C. has ruled.

Vehicle equipment warranties are commonly sold at auto dealerships. Customers pay for vehicle warranty policies as part of the sales purchase at the dealership. On top of charging for premiums and administrative charges remitted back to the insurer, auto dealers will also charge discretionary fees.

In Old Republic Insurance of Canada v. British Columbia, the auto insurer balked at having to pay premium taxes for these discretionary dealership fees.

The decision turned on whether the insurer in this case, Old Republic, “received” any portion of the dealer’s fees. Or, in an even more expansive interpretation offered by the B.C. Ministry of Finance, whether the insurer derived any benefit from the dealer’s fees.

B.C.’s court rejected the finance ministry’s more expansive interpretation.

“I am satisfied that…the definition of ‘taxable premium’ and the…charging section [of B.C.’s Insurance Premium Tax Act] contemplate premium tax being payable by a ‘taxable insurer’ based on the amount of funds the taxable insurer actually received or was legally entitled to receive from ‘premiums,’” B.C. Supreme Court Justice Sheila Tucker wrote in a decision released on Feb. 20.

“On the evidence, no part of the dealer fee is received by DISCC [Old Republic’s sister company] or Old Republic. The province did not advance any argument that Old Republic or DISCC had any legal entitlement to receive the dealer fees. Thus, the dealer fees were neither received nor receivable by Old Republic.”

In October 2003, Old Republic and its sister company DISCC entered into an agreement, in which Old Republic agreed to issue vehicle warranty insurance policies [ORVWPs] requested by DISCC.

In return, DISCC agreed to indemnify and hold Old Republic harmless for any liability arising out of those ORVWPs. DISCC also undertook to perform duties in connection with the ORVWPs, including administering, investigating, and settling claims under the ORVWPs.

At the point of sale, the auto dealerships charged for the sale of the warranties.

Related: How Northbridge beat the taxman

The cost of the warranty policies included two components, the first of which was not under dispute.

The first part covered the cost to the dealer. For example, the dealer charged for the amount kept for loss reserves, a DICC administration fee, and a commission fee for the dealerships to sell the policies.

The second component, a dealer fee, became the source of contention between Old Republic and the province’s Minister of Finance. Simply put, the government felt Old Republic owed premium tax on the dealer fee.

“The dealer fee was set by each participating dealership at its discretion,” the B.C. Supreme Court decision reads. “Dealer fees vary significantly and can be substantial in proportion to the corresponding dealer costs.

“In one sample transaction, the dealership charged a total price of $2,336 for a warranty for which the remitted dealer cost to DISCC was only $877.80 (i.e., the dealer fee was $1,458.20). In another, the dealership charged the customer a total of $5,250, and remitted a dealer cost of $3,412.50 to DISCC (i.e., the dealer fee was $1,837.50).”

The province’s premium tax law states: “‘taxable premium’ of a taxable insurer for a taxation year means a B.C. premium that is received or became receivable by the insurer in the taxation year, other than a premium received.”

Old Republic argued it never received the dealer fees, nor was it entitled to receive them. Therefore, they shouldn’t have to pay premium tax on it.

The province argued that even if Old Republic didn’t actually “receive” the dealer fee, it received a benefit from the fee being charged by the dealers — in the sense that the dealers were selling Old Republic’s warranties — and therefore owed tax on it.

But the court rejected the province’s more expansive definition of the word “receivable,” finding that this definition did not appear anywhere in the premium tax act.

Feature image courtesy of iStock.com/Credit:skynesher