Finances and Condominium Deficits
From the CCI Review 2022/2023-4 May 2023 issue of the CCI London Chapter
When an owner or a director in a condominium property reaches out for information, while CCI can’t provide legal advice nor can we review a financial statement with them, we can direct them to the legislative body that oversees condominiums and/or where they might find resources to assist them in their query.
Queries specific to operation fund deficits are not unusual, but understandably concerning to owners.
This particular query can prompt a review of condominium directors’ responsibility to perform financial due diligence, including monthly scrutiny of all accounts (operations, reserve fund and investments) to ensure the unaudited financial statements are accurate and to address potential issues before they become significant.
If the corporation is, or there is a potential to be in a deficit position, there are options to eliminate it. The Board of Directors can:
- increase the monthly common expenses fees or
- can levy a special assessment.
Directors should be immediately aware if the corporation falls into a deficit and consider these options to ensure they maintain sufficient cash flows. The total common expenses fees recorded each month should agree with the budget, where the budget is based on the ownership percentages in Schedule D of the declaration and that always totals 100%.
The Condominium Authority of Ontario (CAO) provides resources for boards and owners to review when the topic of finances in a corporation are relevant. It is recommended that the CAO Best Practices Guide: Finance be on your list of essential educational resources to assist boards and owners with questions about finances in the condominium. The accompanying tips in the document should be reviewed carefully. You can find it here.
Condos cannot function in a deficit situation. When expenditures are larger than revenues, boards have to use the surplus or contingency fund or increase fees in order to cover this deficit. Every director should invest in education on the financial responsibilities they have assumed to ensure the assets of the corporation are accurate as they are the basis for financial decisions they must make. Good directors will always act in the best interest of the condominium corporation.
Directors are responsible to ensure that the financial statements are accurate for all components of the unaudited financial statements they receive monthly. Bank reconciliation should be included for each bank account in the monthly financial package to review, before they are approved at a Board Meeting. Refer to Section 1.6 of the guide for a list of Accounts and Schedules within the Unaudited Financial Statements and throughout the document for tips deserve particular attention.
It is noted that while common expenses fees are initially deposited into the operating fund account monthly, the reserve fund portion of the fees should be immediately transferred to the reserve fund account. Failure to keep these monies separate is a contravention of section 115 (4) of the Condominium Act. Ignoring this rule will require the auditors to note the contravention in the auditor’s report.
Where a corporation is having financial difficulties and has an operating fund deficit, they may be tempted to borrow from the reserve fund by a transfer to the operating account to help with cash flows. This misuse of the reserve funds is expressly prohibited by section 93(2) of the Condo Act which states:
(2) A reserve fund shall be used solely for the purpose of major repair and replacement of the common elements and assets of the corporation. 1998, c. 19, s. 93 (2).
Directors should also be reviewing all invoices received for work that was done in the period to ensure they are recorded in the payable or accrual listing and if not, then the question is, why are they missing? Automatic payments should not be overlooked. Review of them can make any variance that may have been.
The work you do monthly with Unaudited Statements will prepare you for the preparation of the annual financial statements that are the responsibility of the board of directors, and not the auditors.
CCI can also offer some direction through articles and webinars written or shared by professionals who work in the specific areas of expertise are available to review in the CCI-National Resource Centre here.
CCI-London and Area Chapter has excellent resources on our website where familiar names and faces have shared their expertise:
- Events via Zoom you may have missed are recorded and posted here
- CCI Review publications covering the past few years are posted here
We can never learn too much about the important areas of responsibility in our communities. The Condominium Board Governance and the foundations of good governance are serious for directors to know and understand and cannot be taken lightly.
Common Expenses and Liens
“With great power comes great responsibility”
The Board of Directors has the responsibility to take special care that the lien enforcement powers are carefully and responsibly exercised.
To ensure the corporation’s lien enforcement powers are carefully and responsibly exercised, the board may transfer the activity to the manager/management with the assistance of the corporation’s legal counsel to attend to the intricacies of what can and cannot be the subject matter of a lien and to ensure that the lien powers of the condominium are never improperly used.
(© 2007 Clifton Kok LLP About Condo—more about Condominium Liens here).
Some corporations prefer to use their legal counsel to exercise the expertise and experience required to process and enforce condominium liens. If that is an option preferred, you can reach out to them personally to make that enquiry.
Many of the CCI Professional Legal Counsels also provide information on various subjects relating to their areas of legal practice. Visit their websites to find access to newsletters, blogs and more or like their social media pages.
Trish Kaplan, CCI (Hon’s) is the parttime Administrator of the Chapter.; having served in the position from April 2003 to September 2010. She received the CCI Distinguished Service Award from CCI National in November 2006. Trish served as a director on the chapter board from 2010-2015 and was subsequently returned to the position of Administrator.
Trish is a condominium owner, served as a director in the corporation she resides in for a time and is a retired condominium manager.
Her experience in different areas of condominium continues to be a benefit to the chapter and its members.
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