Condo corporations are not-for-profit organizations. Technically, they are not supposed to make a profit. Having said that, they are not charitable organizations either. When faced with a deficit, condo corporations must collect more from owners to get ends to meet. But what are they to do with a surplus? This is what this post will cover.
How do we set the budget?
Once a year, condo directors do their best to set the corporation’s budget for the following year. They include their known expenses; consider historic trends; project their best estimate of what’s to come; add a buffer and, voilà, you have next year’s budget.
Still, setting a budget is always a difficult exercise. Boards can’t predict the future any better than anyone else. They need to balance the desire to keep fees as low as possible with the aversion of having to special assess if an unforeseen expense throws a monkey wrench in the budget. Contrary to popular belief, condo directors don’t want to pay condo fees anymore than the rest of the owners. But they also owe it to the owners to adequately manage cash flow and keep the operations flowing in a fiscally responsible manner.
Are your condo fees too high? How do they compare? Help us take an accurate picture of condo fees in Ontario by taking our Survey. It is best (but not essential) to have in hand your most recent budget to be able to answer all questions.
In a perfect year, the corporation’s operations are cost neutral (meaning that you end the year right on budget, having collected exactly what you need to pay common expenses). In a bad year, you end up in the red. This will require increased collection. In a good year, the corporation ends the year with a surplus. Now, you’d think that this is a good thing. But such surplus brings its share of existential questions: what is the corporation to do with such a surplus? I remember a year when a corporation’s cladding work came in on time and well under budget. Rather than congratulating the board for their stewardship, some owners complained that the corporation had over collected. These owners wanted to be reimbursed. So, what is a corporation to do with a suplus?
The concept of “common surplus” is defined as the excess of all receipts of the corporation over its expenses. Stated otherwise, the corporation has a common surplus if it collects more than it spends in any given year. Unsurprisingly, when this happens, some owners would like to get their share of what they perceived to be an “over-contribution” reimbursed to them. Regrettably, this can’t be done.
Section 84(2) of the Condo Act provides that a common surplus cannot be distributed to owners. It must instead either:
- be applied against future common expenses; or
- be paid into the reserve fund.
Applying the surplus against future common expenses means that you rollover the surplus into next year’s budget. If you ended the year with $5,000 extra, you theoretically can collect $5,000 less than required following year.
The only exception to the corporation’s obligation to rollover the operating surplus is upon termination of the corporation. This is the only case where an operating surplus can be distributed to owners or mortgagees.
Reserve Fund Surplus
If the operating surplus can either be rolled over onto next year or paid into the reserve fund, what can be done with a surplus in the Reserve Fund? [There’s a moderately amusing oxymoron! Too much money in the reserve fund…]
The reserve fund can only be used for the purpose of major repair and replacement of common elements/assets of the corporation. Any income or revenue earned from the invested reserve fund money must be added to, and automatically forms part of, the reserve fund.
The reserve fund is an asset of the corporation. Section 95(3) of the Act expressly prohibits distributing or reimbursing reserve fund money to owners or mortgagees (again, except when the corporation is terminated).
Special Assessment surplus
The above is also true for any surplus flowing from a Special Assessment.
Once money is collected, it is an asset of the corporation not to be reimbursed to owners (other than through being applied to the following year’s operating budget or to the Reserve Fund).
In the Baliwalla v. YCC No. 428 case, the court had to determine whether a former owner who had contributed to a special assessment was entitled to be reimbursed her “over contribution” once the planned repair came in under budget. In that case, the corporation was facing important cladding work. It advised the owners that 50% of the work would come from the Reserve Fund with the other half being collected through a special assessment.
This owner paid her share, sold her unit and left. She later found out that the corporation was able to negotiate a contract at a much lower price than initially anticipated. She sued to get her share of the surplus reimbursed to her.
The court confirmed that amounts paid by owners relating to a special assessment were common asset and that any leftover was a “common surplus”. Such surplus had to be treated like any surplus, by either adding it to the operating budget or by adding it to the reserve fund. There is no duty on the board’s part to track down past owners who may have paid the special assessment and subsequently moved.