That's pretty shocking! But before I go any further...is the warranty is valid for the country you are in now? It sounds pretty daft but if you are in the UK and have a USA warranty then Canon are well within their rights to charge you for repairing the lens.
Aside from that, as far as I understand the law...(I'm by no means an expert, just had five years in camera retail)
When you bought the lens you were given a warranty by Canon stating that the equipment would correctly for a period of 12 months from the purchase date - within reasonable limits.
If a part has become damaged it is either:
Canon's responsibility to fix it
or
Explain to you (I would request a hand signed written letter) why they don't feel they have to honour the warranty.
It sounds like you are the start of the process so I wouldn't get too worried over it just yet...you may have just had the misfortune of dealing with a new and over zealous engineer.
Keep us posted!
By the way - Canon can't just keep the lens, it is your property, and effectively holding your wallet to ransom! You are well within your rights to ask for it to be returned unrepaired and send it to an independent camera repairers that are authorised Canon repair centres (this is very important!), somewhere like H Leimans would be good...that's where we used to send out stuff...but check that they are still an authorised Canon repair centre.
*edit* just reading the above post while I was writing this..
Personally I wouldn't ring head office and start explaining to them your problem or saying what equipment you will buy in future. With respect to rickydiver, the person as head office won't have a clue what's going on with the repair centres, and will refer you directly to them...and telling them what equipment you are going to purchase is only going to make them shake their head in despair. Anyone can say what they are going to get and it dilutes the issue at hand - getting a lens repaired without having to pay for it.