On July 21, 2011, the Alberta Court of Appeal unanimously held that fees earned through the sale of extended warranties on furniture, appliances and electronic equipment were not subject to provincial tax.  The Provincial Treasurer of Alberta had assessed The Brick Protection Corporation ("BPC") with $700,000.00 in unpaid tax (for the years 1987 to 1993) on the basis that it was selling insurance.  BPC was the obligor on extended warranties being offered to retail customers by The Brick – a sister company.  While the Court was unanimous in finding that the definition of "insurance" in the Alberta Insurance Act, R.S.A. 1980, c. I-5, s.1(k.1) did not encompass BPC’s business model and it was therefore not liable to pay tax as an insurance company.

Writing for the majority, Justice Côté found that Alberta's legislative scheme did not provide a clear answer to the question of whether extended warranties fell within the definition of "insurance" in the  Act.

The Act defines "insurance" as:

[T]he undertaking by one person to indemnify another person against loss or liability for loss in respect of a certain risk or peril to which the object of the insurance might be exposed, or to pay a sum of money or other thing of value on the happening of a certain event. R.S.A. 1980, c. I-5, s.1(k.1).

Justice Côté found that this definition (a virtually identical version of which can be found in every Insurance Act across Canada) had a number of problems that "seriously degrade[d] [its] usefulness” -  It had two alternative and fairly different branches (separated by a comma), it was vague and abstract; and, if read literally, it would cover a host of situations that no one would ever consider insurance.  For example, a contractual indemnity.  In addition, extended product warranties are designed to protect against product failure as a result of defects in the item sold and call for repair or replacement, while insurance policies have historically covered outside risks and provide for a cash indemnity.  Overall, Justice Côté held that the definition of insurance did not "clearly" cover the warranty business.

The Court was unanimous in holding that regardless of whether the definition of "insurance" could be read to include extended product warranties, it was clear that they had not yet been brought within the ambit of the Act as a whole.  There was no evidence before the Court that the Superintendent of Insurance regulated the extended product warranty business or otherwise attempted to enforce such matters as incorporation. organization, licensing, reporting or marketing.  The lack of an intention to enforce the Act supported a finding that the business of selling extended product warranties was not the selling of insurance in Alberta. 

The significance of this finding is that, in fact, the Superintendent of Insurance in Alberta does consider extended product warranties to be insurance and requires that they be sold  through a licensed insurer unless they are offered directly by the manufacturer. The wrinkle posed by BPC’s business model was that it was neither an insurer nor the product’s manufacturer and the Superintendent of Insurance had not taken any steps to interfere.

While this decision was made in the context of a provincial tax assessment from 1987-1993, it is only the second in-depth appellate level judicial consideration of the definition of "insurance" in Canada.  As noted earlier, every jurisdiction in Canada uses a virtually identical definition so the potential application of this otherwise narrow ruling may have a broad impact on how regulators across the country interpret their own provincial Act.

We note that the Court did not refer to the "household appliance insurance" exception under the Miscellaneous Provisions Regulation, Reg. 120/2001 of the Act - presumably because it was not in force during the relevant tax years although other later legislative changes were discussed in the minority reasons. The “household appliance” exception provides that:

4(b)  “household appliance insurance” means a contract of insurance that indemnifies a person who has an interest in a household appliance against the appliance’s malfunction, failure or breakdown. ….

(2)  The Act does not apply to household appliance insurance if the total consideration payable for the insurance is $200 or less.

This provision treats a contract that indemnifies an individual against a product's malfunction, failure or breakdown as “insurance”  This is significant for two reasons.  Firstly, it is fair to presuppose that the majority of BPC's extended product warranties cost less than $200 and secondly, it treats as "insurance" something that does not extend to outside risks - a feature that Justice Côté relied on in finding that BPC's extended product warranty was not insurance.  

Despite the Court’s finding that the Superintendent of Insurance in Alberta had not taken any steps to regulate extended product warranties  - the Superintendent of Insurance in Alberta does, in fact, consider extended warranties to be “insurance”.  In view of that fact and the definition of “household appliance insurance”, the only prudent response from a business perspective is to stay the course and await further comment from the Superintendent of Insurance.