Does Your Council Know the Expectations Around Budgeting?
Does Your Council Know the Expectations Around Budgeting?
We understand most strata councils are very fortunate to have a CPA, CGA or even a bookkeeper as one of their Council members, which is why it is so important for council members to fully understand some of the basic requirements and legalities of preparing and running a budget.
This article will outline a number of facets of budgeting for your strata, some key legalities surrounding budgeting, financial reporting tips and tax filing requirements.
Firstly, a disclaimer. We at All Property Consulting Inc. are not tax advisors, accountants or lawyers. The information gathered in this article is a culmination of information which is public knowledge and put together in one place for your convenience.
Okay, let's begin. Of course every strata corporation needs a budget. This may seem to be a no brainer but...we know of an example of a fully managed properties who had their Annual General Meeting without having their Annual Budget prepared. We also know of many Self-Managed councils who could use a 'little help' understanding all the components involved in budgeting for their strata.
According to the BC Strata Property Act (SPA), sec. 103 (1), a strata corporation must prepare a budget for the upcoming fiscal year. A budget must be passed by a majority vote at each general meeting (AGM).
The proposed budget must be distributed to all owners, along with a 2 week written notice of the upcoming AGM.
Let's begin with the Operating Fund (OF). The operating fund of each Strata Corporation is the fund that receives its funding from maintenance fees paid by the owners. The operating fund pays for all budgeted regular monthly expenses all those other expenses which happen at least once a year and form part of the approved budget.
The Contingency Reserve Fund (CRF) is used to pay expenses which occur less than once a year. The Strata Corporation can only spend money from the CRF when the expenditure is approved by a three-quarter vote at and AGM or SGM or if the expenditure is required for an emergency. In such a case the owners must be notified of the expense in the next Council meeting minutes.
Any transfer of operating surplus must be passed by a three-quarter vote at an AGM for SGM.
Special Levy Funds are funds raised through a special assessment of the owners for major projects such as roof replacements, building envelope repairs, window and door replacements, etc. Special Levies require the owners to approve such projects by a three-quarter vote at an AGM or SGM. It is important to note that a separate bank account be established for each project. Any funds remaining after the completion of a project must be returned to the owners based on the unit entitlement of each strata lot used to calculate the special levy. In some cases, when an owner is entitled to no more than $100, the Strata Corporation can transfer the remaining funds into its CRF.”
Financial Statements for Strata Corporations must contain a number of separate statements and/or reports and should be provided to the Strata Council within 30 days of the end of each month.
The first is generally a Balance Sheet. A balance sheet is a snapshot of the Strata Corporation's financial position at a specific moment in time. It shows the Strata Corporation's assets, liabilities and fund balances at a specific date. A Balance Sheet is typically made up of the following:
- owner's contributions receivable
- other accounts receivable
- prepaid expenses
- restricted cash and short-term investments
- tangible capital assets such as the caretaker suite and fitness equipment
- accounts payable and accrued liabilities
- prepaid owner's contributions
- any mortgages or loans payable
Fund balances include:
- the Operating Fund
- the Contingency Reserve Fund
- a Tangible Capital Assets Fund ( only if there are capital assets recorded on the financial statements)
- any other Reserve Fund or Special Levies Fund (if applicable)
Another aspect to your financial statement would be a Statement of Operating Revenues, Expenditures and Funds. This can include a listing of the following revenues and expenses of a Strata Corporation over a particular period of time such as one month, one quarter or one year.
Sources of revenue for the Strata Corporation refers to:
- strata fees collected from owners
- interest from bank accounts
- fines for violation of bylaws
Expenses for the Strata Corporation are broken down into a few categories.
General and administrative expenses refer to:
- landscaping and snow removal
- utilities such as: electricity, natural gas, water/sewer, garbage removal, cable and internet
- management fees
- wages and benefits
- legal and professional fees
- professional audits
Repairs and maintenance include:
- building repairs
- roof repairs
- janitorial services
- fire protection
- window cleaning
- purchasing supplies
In the 'other' category we can include:
- contributions to the Contingency Reserve Fund
- transfer of operating surplus/deficit to the CRF ( which must be passed by a three-quarter vote at an AGM or SGM)
N.B. It is important to note, Section 105(2) of the Strata Property Act mentions that if there is an operating deficit at the end of the fiscal year, the deficit must be eliminated during the next fiscal year.
The Strata Property Act outlines the financial statement requirements which must contain the following information for the fiscal year:
a) opening and ending balances of the OF
b) opening and ending balances of the CRF
c) details of the Strata Corporation's income from all sources except special levies
d) details of expenditures of the OF including any details of unapproved expenditures (read more about unapproved expenditures here)
e) details of expenditures from the CRF including details of any unapproved expenditures
f) income and expenditures from any special levies
Tax Filing for Strata Corporations
Tax filing for Strata Corporations requires:
1. T2 Corporate Income Tax Return - all Corporations in Canada, including non-profits (like Strata Corporations) must file a T2 Corporate Income Tax return no later than 6 months after it's fiscal year end.
2. T1044 Non-Profit Organization (NPO) Information Return - this must be filed if:
- the corporation received or is entitled to receive interest, rental income or taxable dividends totaling more than $10,000 within the fiscal period;
- the total assets were more than $200,000 at the end of the immediately preceding fiscal period, or;
- a T1044 NPO has been filed in the previous period, which means that once you file it once, you must continue to file every year.
The T1044 NPO must file no later than six months after the end of it's fiscal period. If filing hasn't happened, CRA can issue a basic penalty of $25 a day. There is a minimum, a $100 and a maximum penalty of $2,500 for each return. The CRA gives the opportunity to voluntarily come forward and correct any inaccurate or incomplete information, or disclose any information that has not been previously reported. ( Please do your due diligence if this is indeed your situation)
PLEASE NOTE: This article is for information purposes only and should not be considered legal or financial advice. Please check with a professional accountant regarding your specific situation.
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