December 2019 (updated December 2020)
Reserve fund balances typically remain untouched until needed. It makes no sense for most of these funds, which are being set aside for use in future years, to sit in accounts that do not earn income.
The Condo Act limits reserve fund account investing to eligible financial instruments that are 1) issued or guaranteed by the Government of Canada or one of the Provinces; or 2) issued by an institution located in Ontario insured by the Canadian Deposit Insurance Corporation (CDIC) or the Deposit Insurance Corporation of Ontario. These are supposedly safe investments that guarantee return of principal. They also provide investment returns below the current rate of inflation thus ensuring a “loss” each year.
The most popular investment instrument for reserve fund monies is Guaranteed Investment Certificates or GICs. These promise return of the principal amount if held to maturity plus an annual return that increases as the term increases to a maximum of five years. The highest current rate of return is about two percent.
Government backed bonds, another allowable option, provides for a higher rate of return but at the risk of loss of amount invested. As with GICs, the current rate of return is below the rate of inflation thus ensuring an annual “loss”.
Other provinces have expanded eligible securities for investing reserve fund monies to include Exchange Traded Funds (ETFs), Canadian corporate bonds, shares of Canadian corporations and similar higher yield investments. As with personal investing, these investments come with a higher risk of loss of funds.
An investment plan, a requirement of the Condo Act (Section 115 (8)), should be part of every condo corporation’s planning. The plan should ensure sufficient funds are available for use when needed in accordance with the most current Reserve Fund Study, seek to maximize the return on invested funds, and minimize risk of financial loss.