May 2023
Can capital additions be charged to the reserve fund?
E. C.
Response from Toronto Condo News
Capital additions, also called capital expenditures, are costs involved in buying new assets or improving existing assets.
Capital additions should not be charged to the reserve fund for a condominium corporation.
It is not always clear what should and should not be charged to the reserve fund.
The purpose of the reserve fund is to maintain existing building systems. An upcoming addition does not yet exist so cannot have been considered in the reserve fund study or reserve fund. Using the fund to pay for this expenditure is inappropriate. Once the addition or enhancement exists, it should be reflected in future reserve fund studies and subsequently incorporated in the reserve fund.
Consider a building with no security cameras. A decision is made to enhance building security by adding security cameras to monitor common areas. This would not be charged to the reserve fund. Once cameras have been added, they are now part of the building systems. Their replacement costs are included in future reserve fund studies and the reserve fund is funded for this purpose. Should an existing camera need to be replaced, that can be charged to the reserve fund. Additional cameras, should they be needed, should not be charged to the reserve fund.
Perhaps a condo board chooses to add security cameras or an electronic display monitor to elevator cabs during an elevator upgrade. While the elevator replacement project would be funded through the reserve fund, these upgrades would be charged to the operations account or some other funding account that is not the reserve fund.
Using the reserve fund for a component which has not yet been budgeted for means taking funds are unavailable for a repair or replacement which has been preplanned and budgeted for. This is not an allowable use of the reserve fund. While the Condo Act does allow for this in certain circumstances, it still makes funds unavailable for a preplanned expenditure and is not advisable.
For more information, see Financial Management – Reserve Funds in the Condo Archives.
