Can a company offering extended warranties defer amounts collected as a reserve under the Taxation Act?


Can a company offering extended warranties defer the amounts collected as a reserve under the Taxation Act1? This is what the Court of Quebec is trying to clarify in a recent decision2.

The Quebec tax rules provide, as do the federal rules, that when a taxpayer receives an amount in the course of carrying on a business, it must be included in income for the year3. However, the Act allows, in certain circumstances, a reasonable amount to be deducted as a reserve in order to defer taxation until a later year. Only reserves specifically provided for in the Act are permitted. Among other things, a reasonable reserve may be deducted for services not rendered and paid in advance4.

Section 152 of the Taxation Act, concerning reserves, provides as follows:

    1. No deduction is allowed under section 150 in respect of guarantees or indemnities, in respect of a reclamation obligation, or in the case of a farming business if the taxpayer uses the cash method of accounting in accordance with section 194.

The same applies to reserves in respect of insurance policies, except that in computing an insurer’s income for a taxation year from an insurance business, other than a life insurance business, carried on by it, there may be deducted any amount not exceeding the amount prescribed in respect of the insurer for the year (our underlines).


On the one hand, amounts collected as warranties are not eligible for reserves and on the other hand, amounts collected for insurance on property by an insurance company are eligible. It was in consideration of this section that the Court had to determine whether the “extended warranties” offered on “The Brick” furniture were warranties or insurance in Trans Global Warranty Corp (hereinafter: “TGW”)5.


TGW is a subsidiary of The Brick Wharehouse LP (hereinafter: “Brick”). Brick sells furniture in over 160 stores nationwide. It also offers extended warranties on the furniture sold that cover manufacturing defects and sometimes also risks of dirt, stains, marks as well as protection against food loss in case of a defective refrigerator, etc.

Extended warranties are provided by TGW. The amount collected from customers for the extended warranty is paid to TGW who returns a 20% commission to Brick. Extended warranties are generally for a period of five years. Thus, TGW spreads the taxation of the amount received over the 5 years through the mechanism of provisions for non-rendered services.

In 2013, the ARQ issues a notice of assessment to TGW in which it disallows a $126 million reserve and taxes it in full in the tax year.

Claims of the parties

The ARQ argues that “extended warranties” are guarantees, not insurance. TGW is not a company that is incorporated as an insurance company. Furthermore, TGW would primarily cover risks that arise from manufacturing defects or product failures. These are warranties that are in addition to those offered by the manufacturer. For the ARQ, the extended warranty does not meet the criteria of a typical insurance contract that would cover risks of accident and not risks arising from a manufacturing defect.

TGW, on the other hand, argues that it is a corporation deemed to be carrying on an insurance business under section 817 of the Tax Act and is therefore entitled to deduct a reserve:

    1. For the purposes of this Part, a corporation is deemed to carry on an insurance business in a taxation year if, during that year, it is a party to an insurance contract or other arrangement of a particular class whereby it can reasonably be regarded as undertaking:

(a)  to insure other persons against loss, damage or expense of any kind; […]

The same applies whatever be the form and scope of such contract or arrangement, and even if the persons contemplated are members or shareholders of the corporation (our underlines)6.

Court’s analysis

In order to decide the issue, the court relied on a Court of Appeal decision7 dealing with consumer protection where it had to determine whether an additional warranty contract on a new vehicle was a warranty contract or a contract of insurance.

The Court of Appeal emphasized that the distinction between the two types of contracts can be difficult “since in both cases there is a payment in return for protection in the event of a certain event”8. Nevertheless, it was able to summarize the distinctions:

the warranty relates to a defect in the goods sold and the guarantor has an economic interest in the purchase of the goods by a consumer, as is the case with the manufacturer, the distributor and the merchant.  Moreover, these persons have a legal obligation to guarantee that the good is not affected by a latent defect.  Insurance, on the other hand, is provided by a party who is not obligated to guarantee the quality of the good because of its role in marketing the good and whose primary business is risk speculation9(our translation).

Since TGW did not manufacture or sell the furniture and was not required to guarantee its quality by virtue of its role in marketing it, and since its principal business was speculating on risks, its extended warranty programs were to be considered contracts of insurance and not contracts of warranty.

The court held that TGW was deemed to be carrying on an insurance business under section 817 and was therefore entitled to deduct reserves under section 152 of the Taxation Act. He therefore cancelled the ARQ’s notice of assessment.

Learn more about tax law:

Written with the collaboration of Mr. Luc Robitaille, law student.


1 Taxation Act, RLRQ, c. I-3 (hereinafter “Taxation Act ).
2 Trans Global Warranty corp. c. Agence du revenu du Québec, 2021 QCCQ 13824. It should be noted that permission to appeal was granted on April 4, 2022 on this decision.
3 Taxation Act, section 87.
4 Id., section 150.
5 Trans Global Warranty corp. c. Agence du revenu du Québec, prec. note 2.
6 Taxation Act, section 817.
7 Association pour la protection des automobilistes inc. c. Toyota, 2008 QCCA 761.
8 Id., par. 58 à 62.
9 Id.