Blog PostFebruary 4, 2021 - Educational
Does Our Condo Budget Have To Be “Breakeven”?
A breakeven budget is one where the anticipated revenue is the same amount as the expected total expenses.
A good starting point is to consider the accumulated General (or Operating) fund balance. Should the condominium carry a surplus? The Condominium Act of Ontario acknowledges there could be a surplus – in subsection 84 (2) they indicate a surplus can be used for future expenses or it can be transferred to the Reserve. Good management would suggest there be some surplus.
There are several reasons to hold a surplus:
- While revenues, at least the monthly fees, are received smoothly throughout the year, expenses are not incurred smoothly. A surplus helps ensure there is enough money to cover lump sum or larger payments.
- It is impossible to anticipate all costs for the year, especially repairs and maintenance items. Having a surplus allows the board of directors to react to unexpected or emergency items.
- Having a surplus reduces unnecessary stress for the directors – bills can be paid as they come due.
How much should a surplus be?
It is up to the directors to determine how much they want the corporation to carry in a general fund surplus. In our practice we find many of our condominium clients carry between a half month to three months of fees. For example, if there are 30 units in the corporation and the monthly fee per unit is $350 this corporation may hold a surplus between $5,250 (half month $350 x 30 x .5) and $31,500 (three months $350 x 30 x 3). Other types of Not-For-Profit organizations have a general rule of carrying six to twelve months of current operating expenditures in their surplus.
What about the Not-For-Profit status?
Some have expressed concern that a surplus could result in a condominium losing its Not-For-Profit (NPO) status, thus resulting in corporate tax being levied. The Canada Revenue Agency (CRA) recognizes that some surplus is good management. A recent communication from the CRA stated that a Not-For-Profit carrying a balance of 6 months surplus, or more, may be subject to further review. This possible review does not mean the tax-exempt status will be lost, but reasons explaining the need for the higher surplus might be necessary. If the corporation is rolling over General funds into a GIC each year, that could be ruled as excessive. At RLB we have over 650 NPO clients (condominium corporations plus other Not-For-Profit organizations) and to date, none of these have had any issues with the government regarding their surplus.
Let us now consider the condominium’s budget.
If the board wants to build the condominium’s surplus, can they have a surplus budget (budgeted revenue exceeds the expected expenses)? I think they can and that they should. A budget communicates the board’s intent. Transparency and communication are important within the condominium community. We occasionally see a “contingency” item in a budget. If the board wants to hedge that they may have underestimated some of the costs, this line in a breakeven budget is ideal. However, if their intent is to build up a surplus, I think a surplus budget is called for. In the future, once the condominium has reached the targeted accumulated General fund surplus, the board would build a breakeven budget.
The need for a surplus budget is more common than a deficit budget (budgeted revenue is less than the expected expenses). In the same vein as above, if a board is planning to use some of the accumulated surplus, they would build a deficit budget. Some boards will have a line item called “Use of prior year surplus” – this may create what appears to be a breakeven budget, because they insert this line in the income or expense section of their budget, but when the auditor includes the budget in the financial statements, the budget will show as a deficit one.
The budget is a communication tool. As such, it should clearly represent the board’s plan for the year, therefore it need not always be breakeven.
Gwen Story, B.Com(Hons), CPA, CGA
Senior Manager at RLB LLP, Chartered Professional Accountants