Dubawn Holdings Inc. v. The Queen, 94 DTC 1252, [1994] 1 CTC 2527 (TCC)

Mogan, J.T.C.C.:—There are two issues in this appeal. The first is whether the appellant may report in ten equal annual instalments over the years 1984 to 1993 a large amount received in 1984. The second issue involves alternative claims for a reserve under paragraph (I) or (m) of subsection 20(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") for the appellant’s 1985 taxation year. The only taxation year under appeal is 1985.

The appellant was the promoter of certain residential real estate projects in the municipalities of Cornwall, Trenton and Sterling (all in Ontario). The lands and buildings were owned by 339624 Ontario Ltd. (herein called “No. 624"), a wholly owned subsidiary of the appellant. Each building was certified as a multiple-unit residential building ("MURB"). As promoter of these projects, the appellant would enlist various individuals (herein called "investors") who wanted to purchase an interest in a MURB for its income tax advantages.

The three projects were all sold and closed on December 30, 1983. The appellant’s fiscal period ended on November 30 in each year and so the three projects were sold during the appellant's 1984 taxation year. The commercial agreements used to sell one project were almost identical to the agreements used to sell the other two projects. A description of the sale of the Cornwall project may, except for different amounts, be regarded as a description of the sales at Trenton and Sterling.

As at December 30, 1983, the Cornwall project was encumbered with a first mortgage to the Bank of Montreal in the amount of $845,700; a second mortgage to the Ontario Mortgage Corp. (OMC) in the amount of $201,600; and a "wraparound" mortgage to the appellant in the amount of $1,395,000. Under the terms of the wrap mortgage, the owner (No. 624) made payments only to the appellant as holder of the wrap mortgage; and the appellant was obligated to make payments to the holders of the first and second mortgages in order to keep them in good standing and to protect its position. No cash consideration was paid by the appellant to No. 624 for the wrap mortgage but the amount ($347,700) by which the wrap mortgage exceeded the first and second mortgages was supposed to represent the value of certain services which the appellant had performed and would perform as promoter of the project. The obligation to perform future services could be important for the appellant’s claim to a reserve under paragraph 20(1 )(m) of the Income Tax Acct.

No. 624 and the investors signed a written agreement dated December 30, 1983 under which the Cornwall project was sold to the investors for $1,920,000. The investors paid the purchase price as follows:

(i) $45,000 paid in cash upon closing on December 30, 1983;

(ii) $480,000 by delivering various promissory notes bearing interest at 12.5 per cent per annum (the interest only was payable in monthly instalments with the principal payable at the end of ten years on December 30, 1993); and

(iii) $1,395,000 by the investors’ assumption of the wrap mortgage.

The Cornwall project remained registered in the name of No. 624 but the conveyance was effected by a declaration of trust among the investors, No. 624 and the appellant. No. 624 (as registered owner, in trust) leased the Cornwall project to the appellant (as tenant) for ten years and received a guarantee from the appellant with respect to minimum rental income during the first five years and the second five years. The appellant entered into a service agreement with No. 624 and the investors under which the appellant undertook to provide certain services including the carefree management of the Cornwall project. The transactions were all effected by documents dated December 30, 1983.

The four basic documents in the sale of each project were (i) the sale agreement between No. 624 and the investors; (ii) a trust agreement among No. 624, the investors and the appellant; (iii) a lease from No. 624 to the appellant; and (iv) a service agreement among No. 624, the investors and the appellant. Under the lease, the appellant could possibly earn a profit by paying the agreed rent to No. 624 and then subletting the units for an aggregate greater amount if the market permitted. Under the service agreement, the consideration to the appellant was the assignment of the promissory notes delivered to No. 624 by the investors as part of the purchase price.

In the sale agreement between No. 624 and the investors, the sale price of the Cornwall project was allocated as follows:

The president of the appellant testified and stated that the sale price of each project in December 1983 exceeded the fair market value of the project at that time and was an estimate of what the value would be ten years later in December 1993. This evidence is supported by the above allocation in which only $1,392,000 was allocated to land, building, furniture and fixtures. Also, in the trust agreement, each investor acknowledged that there was no market for his undivided interest as a tenant in common. The last three items in the above allocation appear to be somewhat arbitrary amounts.

The amount identified as "prepaid interest" in the above allocation was determined in accordance with a somewhat complicated formula which was described in evidence as follows. The appellant, as holder of the wrap mortgage, received 11 per cent interest from No. 624 as trustee for the investors but the appellant was obliged to pay interest on the first mortgage (and perhaps interest on the second mortgage to OMC if in default) at higher rates. The first mortgage, registered ahead of the wrap mortgage, bore interest at rates which were approximately two per cent to 2.5 per cent more than the wrap mortgage which was at 11 per cent. A portion of the sale price to the investors was allocated to "prepaid interest" to identify the higher rate at which the appellant would have to pay interest on the first mortgage over and above the rate of interest on the wrap mortgage. The amount of prepaid interest was determined by a formula in which the principal amount of the wrap mortgage (i.e., $1,395,000 for the Cornwall project) was multiplied by the approximate interest spread (two per cent) and then by the term of the wrap mortgage (ten years). In this example, the formula produces the amount of $279,000 which is reasonably close to the amount for Cornwall in the above allocation.

In my opinion, the appellant's rationale for determining the so-called "prepaid interest" amount is artificial and somewhat contrived because, according to the evidence, there was no need to apply the interest spread (two per cent to 2.5 per cent) to the whole amount of the wrap mortgage when it exceeded the principal amount of the first mortgage by such a significant margin. I therefore conclude that the amounts respectively allocated to "prepaid interest" were just as arbitrary as the amounts allocated to mortgage arrangement fee, rental guarantee fee and professional fees. I infer that No. 624 (as vendor) and the investors (as purchasers) were simply splitting into four parts the amount by which the sale price exceeded the aggregate fair market value (as at December 1983) of the land, building and furniture/fixtures; and then putting a label on each part which would make it sound like a deductible expense. This inference which I draw probably has no bearing on the issues to be decided but it indicates the extent to which the transactions were contrived and therefore difficult to discern as to what was really happening.

For convenience, I have summarized in Schedule A attached to these reasons for judgment the three sale transactions which were closed in December 1983. The amounts in Column IV of Schedule A appear in the statement of income which is part of the appellant’s unaudited financial statements as at November 30, 1984 (Exhibit A-5) except that only ten per cent of the rental guarantee fee is shown. The following items were listed as gross revenue in Exhibit A-5:

The interest income of $502,439 is approximately 11 per cent of the aggregate amount of the three wrap mortgages held by the appellant on December 30, 1983. After deducting various expenses, the appellant showed a net income of $1,480,716. In the appellant’s 1984 income tax return, it reconciled its net income with its income for tax purposes as follows:

The Minister of National Revenue received the appellant’s 1984 return and issued a notice of assessment (Exhibit R-1) in accordance with the return as filed. Subject to one item which revised the amount of the reported loss upwards, the notice of assessment showed a revised net loss of $32,642 and taxable income of nil. There is nothing otherwise significant about the Minister’s nil assessment for 1984 which was issued on September 11, 1989. In other words, the Minister accepted the appellants income as reported for 1984 subject to that increase in expenses which increased the loss. In particular, the Minister did not challenge the appellant's right to deduct a reserve under paragraph 20(1 )(n) of the Income Tax Act. The appellant made no attempt to appeal the 1984 taxation year by asking for a loss determination. The appellant's 1984 taxation year is now regarded as closed, sometimes referred to as "statute-barred".

The appellant’s unaudited financial statements as at November 30, 1985 followed a different pattern in the statement of income. Gross revenue was shown as follows:

It is my understanding from hearing the appellant’s counsel that the amount of $100,280 shown as “Prepaid interest" is regarded as one-tenth of the aggregate of prepaid interest which was identified and allocated in the three transactions (the amount of $1,104,000 in line J of Schedule A). The amount of $100,280 does not appear to be one-tenth of $1,104,000 but it is within $10,000 of one-tenth. There was no evidence to explain the discrepancy. In the presentation of this appeal, there was an unfortunate deficiency of accounting evidence concerning how these transactions were recorded. I am not referring to opinion evidence. I am referring to factual information which might have been brought before the Court to show why the transactions were recorded in the financial statements in the way that they appear.

The only witness to testify was Mr. Sahaidak, the president and sole shareholder of the appellant corporation, who is obviously a knowledgeable businessman but he is not an accountant by profession. Whenever questions were put to him, particularly in cross-examination, concerning the appellant's financial statements or the way the transactions were recorded, he pleaded that he simply did not know because he left that to his accountants. Given the complexity of these transactions and what I regard as the contrived manner in which the sale prices were allocated, evidence from some accountant would have been helpful to explain the recording of the transactions. Indeed, if I had had the benefit of such evidence, I might not have been inclined to infer that the recording of the transactions was contrived.

What happened in the appellant’s unaudited financial statements as at November 30, 1985 (also part of Exhibit A-5) seems extraordinary because, under gross revenue, the appellant shows as "prepaid interest" an amount which, I am told by counsel, is about one-tenth of the aggregate prepaid interest for the three projects. Under “rental guarantees”, there is an amount of $30,240. In the prior year, I could at least see how the appellant reported precisely one-tenth of $336,000 because the financial statements showed $33,600. In 1985, there is no explanation as to why this item drops to $30,240.

Similarly, under interest for "wrap mortgages", there is shown only $56,538. The principal amounts of the wrap mortgages in aggregate were about $4,500,000. At 11 per cent interest, the wrap mortgages should have produced income of approximately $500,000 in 1985. On the accrual basis, I assume that the appellant should have recorded approximately $500,000 interest from wrap mortgages even if it were required to deduct a reserve for doubtful debts wit respect to interest that may not have been received. Interest in the amount of $56,538, without any explanation, appears to be about one-tenth of what should have been the interest from the wrap mortgages. The appellant's unaudited financial statements as at November 30, 1985 show a loss for the year of $279,763.

When the appellant filed its income tax return for 1985, (i) it reported the loss of $279,763; (ii) it filed an amended return for 1984 purporting to show 1984 income of $445,837; and (iii) it requested a carry-back of the 1985 loss against the revised 1984 income. The Minister of National Revenue refused to recognize the appellant’s amended income tax return for 1984. Exhibit R-2 is the notice of assessment for 1985 issued on September 11, 1989 which is the assessment under appeal. Attached to Exhibit R-2 is the form T7W-C showing the adjustments the Minister made to the 1985 income as reported by the taxpayer. This is worth following because it leads directly to the issues in this appeal. The adjustments are as follows:

Previously reported Income (Loss) $(279,763) Adjustments to Active Business Income:

Add:

	20(1 )(n) reserve deducted in 1984	1,481,294
		$1,201,531
Deduct	Deduct:
	1985 "prepaid interest" reported in income	100,280
	Revised Taxable Income	$1,101,251

If I could summarize what the Minister did, he accepted the loss as reported on the 1985 financial statement; he added the amount ($1,481,294) of the reserve which the appellant had deducted in 1984; and he deducted the amount of prepaid interest which the appellant had volunteered as part of its gross revenue. It is that assessment which is under appeal. There was no evidence as to why the Minister eliminated the amount ($100,280) shown in the 1985 financial statements as prepaid interest.

The appellant’s principal argument is that the gross amounts received from these projects during its 1984 taxation year should be reported in ten equal yearly amounts because the obligations which the appellant assumed on December 30, 1983 would be discharged over the next ten years. The appellant relied on section 9 of the Income Tax Act to support that argument. Counsel argued that his position was consistent with generally accepted accounting principles but there was no expert evidence before the Court to indicate what generally accepted principles would be in reporting a transaction like this. I was referred to certain passages from the handbook of the Canadian Institute of Chartered Accountants, commonly known as the “CICA Handbook”, but the bare language of the handbook gave no support to the appellant's position.

I suggested to the appellant’s counsel that it was not consistent to argue that only one-tenth of the income from the projects should be reported under section 9 of the Act as the accountants' method of showing profit for 1985 when the appellant itself had used a different method to determine profit and invoked other sections of the Act, like paragraph 20(1)(n), when reporting its income for 1984. What happened in 1984 is a closed book but I cannot ignore the fact that the appellant's financial statements for 1984 disclosed a significant amount of profit ($1,480,716) which was reduced to nil for income tax purposes only by deducting a reserve under paragraph 20(1 )(n).

It appears, although the matter was not argued but only alluded to, that paragraph 20(1 )(n) was not a provision under which the appellant was permitted to deduct a reserve in 1984 because the appellant was not the vendor of the property involved in these appeals. The fact is, however, that a reserve was deducted in 1984 under paragraph 20(1 )(n) and it was allowed by the Minister, rightly or wrongly, correctly or incorrectly.

There are two decisions of the Federal Court of Appeal which indicate, in clear language, that when a reserve has been deducted in a particular taxation year (like a reserve under paragraph (I), (m) or (n) of subsection 20(1) of the Act) it does not matter whether the reserve was actually permitted by law, or whether it was innocently but incorrectly deducted by the taxpayer and innocently but mistakenly allowed by some agent of the Minister when issuing an assessment. The decisions in Dominion of Canada General Insurance Co. v. The Queen, [1986] 1 C.T.C. 423, 86 D.T.C. 6154 and Sears Canada Inc. v. The Queen, [1989] 1 C.T.C. 127, 89 D.T.C. 5039, establish that, if a reserve is in fact claimed and allowed in a particular taxation year, the legality of the allowance is not material and the amount that was in fact deducted must be included in computing the income for the immediately following year.

On the appellant's principal argument (reporting in ten equal yearly amounts), the appellant cannot avoid the consequence of bringing into its 1985 income the amount ($1,481,294) which it deducted under paragraph 20(1 )(n) for 1984. Therefore, with respect to the assessment under appeal, the Minister was correct in adding back the amount of $1,481,294. Also, I was not referred to any authority which would permit the appellant to report in 1985 only one-tenth of a gross amount which ought to have been included in computing its income for 1984. This will dispose of the appellant’s principal argument.

The appellant has two alternative arguments. It claims a reserve under paragraph 20(1 )(m) in respect of services that will have to be provided in subsequent years and, if I should find against a reserve under 20(1 )(m), then the appellant claims a reserve for doubtful debts under paragraph 20(1 )(l).

At first blush, the appellant's claim to a reserve under paragraph 20(1 )(m) is difficult to support because of the way the transactions were recorded in its financial statements. On this question, I heard additional argument from counsel three months after the conclusion of the trial. There is only one kind of consideration which the appellant received for rendering services under the service agreements, and that is the assignment of the promissory notes which were held by No. 624. The fourth recital in the Cornwall service agreement (Exhibit A-3) states:

AND WHEREAS as part of the purchase price, the owner (i.e., individual investors) delivered to the trustee (i.e. No. 624), a promissory note (hereinafter referred to as the "note") in the principal amount of $480,000.00 which note has been assigned to Dubawn (i.e. the appellant) as consideration for the services to be performed by Dubawn pursuant to the within agreement.

I cannot find any consideration to be received by Dubawn other than the notes for rendering the services described in the service agreement (Exhibit A-3) which states in paragraph 2:

Dubawn agrees to provide services in respect of the property and covenants to satisfy and guarantees to pay the projected expenses and payments set forth in Appendix "I" hereto.

Appendix I is just a list of the four components of the Cornwall purchase price which were allocated to items other than land, building and furniture/fixtures (see Schedule A to these reasons):

I have concluded that there is a misunderstanding in Mr. Sahaidak's mind about the way the service agreements worked. He must think that the above items in Appendix I for the Cornwall project have been converted into consideration received by the appellant under the service agreement because, in Exhibit A-1 which is supposed to be a one-page financial data summary, the amount of $288,000 is identified as "Amount of consideration received by Dubawn for prepaid interest service pursuant to service agreement". According to the Cornwall documents, as I read them, the amount of $288,000 was never received or intended to be received by the appellant for prepaid interest. On the contrary, it is an amount that the appellant has covenanted to pay to No. 624 (as part of the purchase price) on behalf of the investors.

Part of the problem in this case is the absence of a clear statement concerning who did what and for what consideration. One has to look at what the appellant received under the service agreements and what it undertook to do. Under the service agreement for Cornwall, the appellant received an assignment of the notes having an aggregate principal amount of $480,000 and, as part of its "services", it undertook to discharge the expenses in Appendix I which came to $528,000, about ten per cent more than the principal amount of the notes. As lessee of all the units, the appellant had the opportunity to make a profit by subletting the apartments for an aggregate amount higher than the rent it paid to No. 624. If it did not make such a profit, the appellant would have to rely on interest from the notes to pay the expenses in Appendix I to the extent that such expenses exceeded the principal amount ($480,000) of the notes. In Sterling, the note was $240,000 and the aggregate of expenses which the appellant undertook to pay under the service agreement was $252,000 which is only five per cent more than the note. But in Trenton, the notes were $840,000 and the appellant covenanted to pay expenses of $1,040,000 which is about 24 per cent more than it received in the notes.

Although these amounts which the appellant promised to pay were greater than the aggregate principal amounts of the notes received, I am satisfied that the appellant did render valuable services both to the investors and to the vendor (No. 624) by providing a care-free investment to the investors and administering the properties for No. 624, the registered owner of the properties and trustee for the investors. I find that the appellant received, in its 1984 taxation year, by assignment of the notes, amounts for services to be rendered in 1984 and in subsequent years. Therefore, the appellant has satisfied one of the conditions for the deduction of a reserve under paragraphs 20(1 )(m) and 12(1 )(a) which state:

20(1) Notwithstanding paragraphs 18(1 )(a), (b) and (h), in computing a taxpayer's income for a taxation year from a business or property, there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:

(m) subject to subsection (6), where amounts described in paragraph 12(1 )(a) have been included in computing the taxpayer's income from a business for the year or a previous year, a reasonable amount as a reserve in respect of

(i) goods that it is reasonably anticipated will have to be delivered after the end of the year,

(ii) services that it is reasonably anticipated will have to be rendered after the end of the year. . . .

12(1) There shall be included in computing the income of a taxpayer for a taxation year as income from a business or property such of the following amounts as are applicable:

(a) any amount received by the taxpayer in the year in the course of a business

(i) that is on account of services not rendered or goods not delivered before the end of the year or that, for any other reason, may be regarded as not having been earned in the year or a previous year, or. . . .

Upon the assignment of the notes, the appellant received in its 1984 taxation year in the course of a business an amount "on account of services not rendered .. . . before the end of the year" within the meaning of subparagraph 12(1 )(a)(i). The other condition is whether that amount has "been included in computing . . . income from a business for the year or a previous year” within the meaning of paragraph 20(1 )(m).

The aggregate amount of notes receivable from the Cornwall, Sterling and Trenton projects ($1,560,000) is listed among the assets on the appellant’s balance sheet as at November 30, 1984. This is consistent with the fact that the notes were assigned to the appellant under the three service agreements dated December 30, 1983. The aggregate amount of the notes is not specifically shown, however, in the appellant’s gross revenue for the fiscal period ending November 30, 1984. This is puzzling because the notes were assigned to the appellant on December 30, 1983 under the three service agreements as consideration (i.e. revenue) for services to be rendered. What I find even more puzzling is the fact that the appellant shows as revenue for its fiscal period ending November 30, 1984 amounts which are payable to No. 624 (and not to the appellant) by the investors as part of the consideration for the property purchased by the investors on December 30, 1983; and the appellant under the service agreements has promised to pay those same amounts to No. 624 on behalf of the investors. Those amounts in Appendix I to the service agreements are not and never were revenue of the appellant. I come back to my earlier statement that Mr. Sahaidak and his bookkeeper have misunderstood the way that the service agreements worked.

The appellant’s statement of income for its fiscal period ending November 30, 1984 is in error because it shows the following amounts as revenue when those amounts were not the appellant’s revenue:

On the other hand, that same statement of income fails to show the aggregate amount of the notes ($1,560,000) received by the appellant under the three service agreements when the notes were clearly received on revenue account. It may be a coincidence thatthe revenue reported in error ($1,517,600) is almost the same as (97.25 per cent of) the revenue which is not shown at all ($1,560,000). By substituting 97.25 per cent of the amount ($1,560,000) which clearly was revenue but not shown for the amount ($1,517,600) which was not revenue but was shown, I could conclude that the appellant did include in computing its income from business for the 1984 taxation year almost all of the income received under the service agreements. Relying on the documents produced as Exhibits A-2 (Sterling), A-3 (Cornwall), A-4 (Trenton) and A-5 (financial statements) I am prepared to make that substitution. I hold that the appellant included in computing its income from business for the 1984 taxation year the amount of $1,517,600 on account of services not rendered before the end of that taxation year. In my opinion, the appellant has satisfied the second condition required for the deduction of a reserve under paragraph 20(1 )(m) of the Act.

The above findings with respect to the appellant's right to deduct a reserve under paragraph 20(1 )(m) relate to the 1984 taxation year which is not under appeal. Also, it is a matter of evidence that the appellant in fact deducted a reserve of $1,481,294 purportedly under paragraph 20(1 )(n) when computing its income for 1984; and the Minister of National Revenue mistakenly allowed that reserve. Therefore, correctly or incorrectly, there was a reserve deducted by the appellant in 1984 and allowed by the Minister. In a reassessment for the 1985 taxation year, the Minister added the amount of that reserve ($1,481,294) to the appellant's reported income (loss) and I have already held that the Minister was correct in so doing. The effect of the reserve (erroneously claimed in 1984 and allowed) and the reassessment is that a significant portion of the appellant’s 1984 income has been carried forward to 1985.

In my view, all of the conditions required for the deduction of a reserve under paragraph 20(1 )(m) in the appellant’s 1985 taxation year have been satisfied. It is only a matter of determining the amount of the reserve in which I think there are two important factors. Firstly, the reserve may not exceed $1,481,294 (the amount carried forward from 1984). And secondly, the appellant has performed in its 1984 and 1985 taxation years, at least two tenths of the services referred to in the service agreements.

There are three parties to each service agreement: No. 624 as registered owner and trustee of the respective property, the individual investors who are the beneficial owners of the property, and the appellant as lessee of the property. The consideration paid to the appellant for its services under each agreement was the assignment of the notes delivered by the individual investors to No. 624 as part of the purchase price for the property. Apart from its promise to pay the projected expenses listed in Appendix I to each agreement, the appellant also promised (clause 3) to perform certain other services which included:

(i) using best efforts to find responsible tenants;

(ii) arranging appropriate insurance against fire and other perils;

(iii) providing maintenance and upkeep;

(iv) filing documents required by statute other than income tax returns; and

(v) providing accounting services and annual financial reports.

If the appellant failed to pay any of the projected expenses in Appendix I, the individual investors had a right to set off against their notes any amounts which they were required to pay with respect to such expenses (clause 6). Also, the appellant agreed to indemnify the individual investors from any liens or other claims with respect to the property during the term of the service agreements (clause 9). Having regard to the services which the appellant was required to perform during the term of each agreement, I cannot find any evidence which persuades me that those services were not performed in a relatively level manner over the ten year term of each agreement. Therefore, I conclude that the appellant earned in each year one tenth of the aggregate consideration payable to the appellant under the service agreements.

It should be apparent from some of the statements above that my view of the appellant’s gross revenue for its fiscal period ending November 30, 1984 is different from the gross revenue shown in the appellant's unaudited financial statements for that fiscal period. Specifically, if the assigned notes ($1,560,000) are substituted for the amounts ($1,517,600) taken from Appendix I in each service agreement, the appellant has under-reported its income for 1984 by $42,400. That amount would be partly offset by the reserve which, in my opinion, the appellant was entitled to deduct in 1984 under paragraph 20(1 )(m). I am required to go back to that gross revenue amount of $1,560,000 because that is the amount on which the reserve should be computed if the gross revenue is to be distributed in a level manner over the ten-year term of the service agreements. I would have allowed the appellant a reserve of 90 per cent in 1984 on the basis that it had earned ten per cent of its service remuneration in that year. The same reasoning would apply to 1985. I would compute the reserves as follows:

Under paragraph 20(1 )(m), the appellant may deduct ‘a reasonable amount as a reserve". I have already concluded that the reserve for 1985 may not exceed the amount ($1,481,294) brought forward from 1984. I would allow the appellant to deduct as a reserve under paragraph 20(1 )(m) for its 1985 taxation year an amount not exceeding $1,248.00.

Counsel for the respondent argued that the appellant was not entitled to a reserve under paragraph 20(1 )(m) because of the limitation in subsection 20(7) which denies a reserve in respect of guarantees, indemnities or warranties. In support of that argument, counsel cited the decisions in Mister Muffler Ltd. v. The Queen, [1974] C.T.C. 813, 74 D.T.C. 6615 (F.C.T.D.), Paul Burden Ltd. v. M.N.R., [1981] C.T.C. 2847, 81 D.T.C. 651 (T.R.B.), Amesbury Distributors Ltd. v. The Queen, [1984] C.T.C. 667, 85 D.T.C. 5076 (F.C.T.D.), and Sears Canada, supra. Those cases were concerned with the sale of products and equipment which were tangible personal property; and the courts were able to infer that the amounts received were in consideration of a warranty or an indemnity against the costs of repairs and maintenance. In this case, the appellant promised to perform certain services as opposed to the sale or delivery of goods. Therefore, I do not see a connection between the services promised by the appellant and any warranty or similar obligation. The indemnity in clause 9 of the service agreements offered the individual investors limited (if any) protection with respect to the appellant’s own failure to perform the services and keep the properties free of liens and other claims. Clause 9 is not like an indemnity agreement with respect to accidents or the conduct of third parties. In any event, the main thrust of the service agreements is not related to guarantees, indemnities or warranties within the meaning of subsection 20(7). Having decided that the appellant is entitled to deduct a reserve under paragraph 20(1 )(m), it is not necessary for me to consider the appellant’s alternative claim to a reserve for doubtful debts under paragraph 20(1 )(l). The appeal is allowed with costs.

Appeal allowed.