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February 17, 2005

The Capital Replacement Reserve Fund

Ana and Marc Bateman

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The often-misunderstood Capital Replacement Reserve Fund is a very important aspect of a condominium corporation’s financial responsibility. With the enactment of the 2000 Condominium Property Act, the condominium corporation was made responsible for the control, management and administration of it’s real and personal property and the common property.
In layman’s terms, it means that the corporation is responsible to maintain and keep its real, personal and common property in a state of good and serviceable repair. As defined by the Condominium Property Act, “common property” is property that is not comprised in a unit, which is shown in a condominium plan.

Plainly stated, the Condominium Property Act requires that a condominium corporation establish and maintain a Capital Replacement Reserve Fund to be used to provide sufficient funds that can be reasonably expected to provide for major repairs and replacement of the corporation’s real, personal and common property, in which the repairs or replacements do not normally occur annually.

The Act further stipulates that these funds not be used to make capital improvements, unless authorized by a Special Resolution and that after the removal of those funds there are sufficient funds remaining in the Capital Replacement Reserve Fund to provide for the corporation’s major repairs and replacement of capital items as required.

A corporation may invest any portion of these funds not immediately required, but only in those investments, which are allowed for under the Trustee Act.

In order to meet the Act requirements of a Capital Replacement Reserve Fund, a corporation’s Board of Directors must retain a “qualified person” to carry out a study of the depreciating property for the purpose of determining:
    •    an inventory of the depreciating property that is normally used and may need to be repaired or replaced within the next 25 years;
    •    the present condition or state of repair of the this property and an estimate as to when each component will need to be repaired or replaced;
    •    the estimated costs of repairs or replacements;
    •    and the life expectancy of each component once that property has been repaired or replaced.

In carrying out this study, the “qualified person” must also determine:
    •    the corporation’s current amount of reserve funds, if any; and
    •    recommend the amount of funds, if any, that should be included in or added to the corporation’s Reserve Fund to establish and/or maintain it.

Once the study is complete, the person(s) who carried out the study must prepare and submit to the Board a written Reserve Fund Report setting out:
    •    their qualifications;
    •     whether or not this person(s) is an employee or agent or is associated with the Corporation or any person who performs management or maintenance services for the Corporation;
    •    the Reserve Fund Study findings; and
    •    any matters that are considered relevant.

Once the Board is in receipt of this report, they must prepare and approve a Reserve Fund Plan under which a Reserve Fund is to be established, if one has not already been established and setting forth the method of and the amounts needed to fund and maintain the Reserve Fund. It is important to note that Reserve Fund monies must not be commingled with or used to offset any deficits in the corporation’s Operating Funds.
The Condominium Property Act requires that the Reserve Fund Study be updated every five years from the approval date of the most recent Reserve Fund Plan. This ensures that the information is kept relatively current and useful in stewarding the condominium corporation.

This Study enables the corporation to plan responsibly for the repair and maintenance of the corporation’s capital items such as roofing, exterior painting, mechanical systems, etc. on an annual basis. It helps ensure that the corporation has the funds available when they are needed as many of these capital repairs and replacements can be costly. It is important to have a good maintenance program as it can help extend the life of many of the items.

An Annual Report must be made available and should be distributed to the owners to advise them of:
    •    the amount of the Reserve Fund as of the last day of the immediately preceding fiscal year;
    •    all the payments made into and out of the Reserve Fund for that year; and
    •    a list of the property that was repaired or replaced that year and the costs incurred.

Proper funding of the Reserve Fund is prudent and can help ensure that a Corporation will not have to “Special Assess” it owners to meet the costs of repairing or replacing a corporation’s capital items. 

Marc Bateman, BA, ACCI, CPM, is the President and Broker of Acclaim Condominium Managers. He holds a Bachelor of Arts degree and the following industry designations: CPM (Certified Property Manager), ACCI (Associate of the Canadian Condominium Institute), CMOC (Certified Manager of Condominium) and ARM (Accredited Residential Manager).

Ana Bateman, BSc, MEd, is an Agent and the Managing Director with Acclaim Condominium Managers, which has specialized in Condominium Management in Calgary and surrounding areas for the last decade.

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