BC Supreme Court clarifies taxation rules on vehicle warranty insurance premiums

In a recent decision, the BC Supreme Court clarified the taxation rules on vehicle warranty insurance premiums under the Insurance Premium Tax Act (IPTA).

The Old Republic Insurance Company’s appeal contested the Finance Minister’s decision regarding the taxation of vehicle warranty insurance premiums from 2013 to 2017. The Old Republic challenged the Minister's interpretation, asserting that the tax should not include the retail markup paid by policy purchasers to vehicle dealerships and that the appropriate tax rate was 4 percent, not the enforced 4.4 percent

At the center of the dispute was whether the Old Republic had underreported its taxable premiums by excluding amounts paid by purchasers to dealerships as a markup over the actual insurance cost. Additionally, the correct tax rate applicable to these premiums was questioned, with the Old Republic advocating for a 4 percent rate against the ministry's position of 4.4 percent.

The court's analysis revolved around interpreting the IPTA, focusing on the statutory definitions of "taxable premium," "BC premium," and "premium." Critical to the appeal was the understanding of premiums "received or receivable" by the insurer, a concept central to determining the tax obligations of Old Republic.

Old Republic's stance was that dealer markups, constituting a portion of the overall amount paid by consumers for vehicle warranty policies, should not be considered part of the taxable premiums as they were retained by the dealerships and not directly received by Old Republic. Moreover, Old Republic contended that vehicle warranty insurance should not be taxed at the higher 4.4 percent rate applicable to property and automobile insurance under the IPTA but rather at the general 4 percent rate.

The court found that the dealer fees in question were not "received or receivable" by Old Republic for the purposes of the IPTA, aligning with Old Republic's argument on this point. However, it diverged on the applicable tax rate, concluding that vehicle warranty insurance premiums fell under the "property insurance" defined by the IPTA, thereby attracting the 4.4 percent tax rate.

Ultimately, the court clarified that while certain fees collected by intermediaries are not taxable premiums in the eyes of the law, the nature of the insurance product itself dictates the applicable tax rate.