Le Groupe PPP Ltée v. The Queen (January 16, 2017 – 2017 TCC 2, Tardif J.).
Précis: The taxpayer operated a form of loss protection plan which enabled drivers whose vehicles were the subject of a partial or total loss (it is not clear from the decision whether “loss” covered theft) to receive a new vehicle from the dealership where they purchased the original vehicle. In effect, the plan topped up the payment received from the vehicle’s primary insurer, which was limited to the depreciated value of the vehicle. The taxpayer claimed ITCs on the basis that it was a form of “warranty” program within the provision of section 175.1 of the Excise Tax Act (the “ETA”). CRA denied the ITCs on the basis that the plan was a form of “insurance” which was specifically carved out of section 175.1. The Tax Court found that the plan operated as a form of insurance, not a warranty, and dismissed the appeal with costs.
Decision: The facts of this case, as evidenced by portions of the Notice of Appeal admitted by the Crown (para. ), were somewhat complex:
• Prior to October 1, 2010, the appellant offered, among other things, a replacement warranty for motor vehicles (the “warranty”).
• The warranty was offered to vehicle purchasers as a supplement to the primary insurance offered to them by their primary insurers.
• Indeed, at the time, primary insurance generally only indemnified the insured for the depreciated value of the vehicle at the time of the loss. For example, in the case of a vehicle purchased at the price of $25,000 in 2005 with a replacement value of $29,000 and a depreciated value of $9,000 in 2009, at the time of an accident leading to a total loss, the primary insurance offered the client an indemnity of $9,000 (the “primary indemnity”).
• The replacement warranty was offered by the appellant through automobile dealers (the “merchants”) based in Quebec and with whom the appellant had entered into a distribution contract (the “distribution contract”).
• Under the distribution contract, the merchant, acting as an agent for the appellant, undertook to offer the warranty on the appellant’s behalf at the time of sale of a motor vehicle.
• More specifically, under the distribution contract, the merchant undertook to comply with the following obligations:
a. to sell the warranty on the appellant’s behalf;
b. to collect the sale price indicated in the warranty contract reached with the client (the “warranty contract”); and
c. to hold the amounts as a trustee for the appellant until they are handed over to the latter.
• To be entitled to a replacement vehicle in the case of loss of an insured vehicle, the client must have respected the conditions and obligations set out in the warranty contract. Among these obligations, the client was required to hold primary insurance on the insured vehicle at all times.
• Under the warranty contract, in the event of loss of the insured vehicle, the claim process (the “claim”) was to be conducted through the merchant, under the appellant’s management and on its behalf.
• In the event of a claim, the replacement vehicle was the object of a contract of sale between the merchant and the client (the “contract of sale”).
• As set out in the contract of sale, the sale price of the replacement vehicle included, among other things, the applicable GST.
• Part of the sale price of the replacement vehicle was covered by the client’s payment of the primary indemnity of the primary insurer, as set out in the warranty contract.
• To meet its obligations as a supplier of warranties, the appellant had entered into an agreement with La Capitale General Insurance (“La Capitale”), and the latter had, in accordance with that agreement, issued a compensatory insurance policy covering the appellant’s obligations.
• In about 2012, the relationship between the appellant, the merchants and the clients was the subject of a request for interpretation sent to the respondent.
• On March 8, 2012, the respondent issued a letter of interpretation stating that the appellant (as opposed to the merchants) was the supplier of the taxable supply to the client, with the merchants acting as the appellant’s agents.
• Prior to October 1, 2010, the sale of such insurance was not regulated by the Autorité des marchés financiers (“AMF”).
• Since October 1, 2010, the AMF has been regulating the warranty, which has become an insurance product called “Q.P.F. No. 5”. Therefore, any person wishing to issue such a product must hold an insurer’s licence duly issued by the AMF.
• However, in accordance with its obligations, the appellant continued to honour the warranty contracts entered into before October 1, 2010.
The taxpayer’s position was simple: the plan was a warranty within the meaning of section 175.1 of the ETA and therefore it was entitled to ITCs’ The Crown’s position was that the plan was a form of insurance and therefore specifically excluded from the provision of section 175.1.
The Court preferred the Crown’s position:
 That was the Reply to the paragraph in the Notice of Appeal that reads as follows:
In no case did the warranty enable the client to claim an amount of money. The warranty only entitled the client to a replacement vehicle.
 The argument was repeated insofar as the appellant submitted that the contract could not be an insurance policy because the consumer is not entitled to an indemnity but essentially to a replacement vehicle.
 The consumer consented to the contractual provision that sets out how things would be done; however, that provision was included to satisfy the interests of the dealer that sold the protection plan to the consumer, ensuring that the dealer would profit from the new vehicle and the service continuity, which was another dimension to the dealer’s benefit.
 That is a subordinate clause that, on its own, does not alter the fundamental nature of the contract. Moreover, as already mentioned, it is easy to imagine a great number of situations where a settlement should result in an indemnity.
 The essential and genuine object of the contract is the value of the replacement, the cost that the appellant has to pay and the existence of conditions that entitle it to the replacement value, including primary insurance and total loss due to theft and/or accident.
 Moreover, the condition is essentially advantageous to the dealer that benefits from the sale of protection plans that enable it to earn a significant commission on the premium and the potential other sale of a replacement vehicle to the same consumer. For the appellant, the sale of the plans and everything that goes with them is part of its business activities.
 The consumers’ obligation to deal with the dealer that sold them the protection plan is something completely secondary because their ultimate objective is to obtain an equivalent vehicle in case of a theft or a total loss. In this regard, consumers can argue that they are entitled to an indemnity if it is impossible for them to comply with their undertaking because of something beyond their control, such as the closure of the garage, discontinuance of the brand, disappearance of the manufacturer, etc.
 The goal of the protection plan is to enable the person who acquired it to obtain a new vehicle without suffering the loss due to depreciation increasing year after year that the person would have had to assume because the primary insurer’s liability is limited to the depreciated value.
 Moreover, it is common knowledge that conventional insurers [defined as primary insurers] offer this type of protection with no obligation to purchase the replacement vehicle from the same dealer.
 The argument that the contract is a warranty only because of the consumers’ obligation to deal with the dealer that sold them the protection plan to replace the eligible vehicle (total loss or theft) is not very convincing.
 This is a not a determinative factor for qualifying the nature of the contract.
 With respect to the risk assessment for each client, I do not accept that argument because the appellant knew or ought to have known the degree of risk determined in part by the primary insurer; on the other hand, the appellant could revisit its prices at any time on the basis of its files and its budgetary forecasts.
 Subsection 175(1) of the Act provides that the warranty must relate to quality, fitness or performance.
 The appellant submits that the total loss from an accident or theft is a situation that can and should be included in quality, fitness or performance.
 At first glance, the quality, fitness or performance of a vehicle has nothing to do with theft or total loss. They are essentially situations related to the purpose and use of the vehicle.
 For all these reasons, the appellant does not meet the conditions of subsection 175(1) of the Act to benefit from the exception.
The Tax Court found that the plan operated as a form of insurance, not a warranty, and dismissed the appeal with costs.