Reserve Funds and the HST
May 2010

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By Hayley Mitchell

Sally Thompson is the National Practice Leader for property condition assessment services at Halsall Associates Limited, a leading Canadian consulting engineering firm with expertise in building restoration engineering, cladding engineering, building science, green building planning and design, structural engineering and property condition assessments (including Reserve Fund Studies and Performance Audits for Condominiums). Sally is also President of Buildingweb, which provides web-based reserve fund planning software, and a director of CCI Toronto.  She talks to us about the effects that HST will have on reserve funds and how to manage the impact.

“The capital costs that make up the reserve fund studies, we expect to go up about five percent,” not the full eight percent of the HST, says Thompson, explaining that even though the HST is being added, the PST will be taken off any materials purchased for the reserve fund projects, thus bringing down the overall increase to about five percent. While operating costs may go up six to seven percent, reserve fund costs will only be expected to rise about five percent, according to Thompson.

However, a five percent rise in costs may translate to more than five percent rise in reserve contributions. Thompson explains this with a simple example:

Putting inflation and interest aside, imagine a condominium with a $1 million expenditure after 10 years. Before HST, that condo would save up $100,000 per year in the reserve fund in order to reach that million dollar mark after 10 years. But now, with HST that condo will need $1,050,000, a $50,000 increase. If the condo is brand new, this is not a problem, as they have that 10 years to save and can simply put aside $105,000 per year, only requiring an extra $5,000 per year. The complication arises when that condo is nine years old and has been diligently saving for the last nine years. They now have $900,000 in reserve, and yet they suddenly need an extra $50,000, meaning that in their 10th year they will need to save $150,000, which is a 50 percent increase that year, not the five percent increase that one would expect. Therefore, those who will be affected the most by HST are the older condominiums with large fund balances and big expenditures coming up over the next few years.

Based on a sampling of Halsall’s studies across Ontario, they project that there is probably about $1.7 billion in reserve funds for all of the condominiums in Ontario, thus the “missing HST” on those funds represents about $90 million. That results in about $175 in additional costs per condominium unit across the province.

So, should you update your reserve fund studies immediately due to HST? Thompson says there are two answers to this question:
If your reserve fund is going to go to a low balance in the next five years, yes, you should do an update.  But if you are a newer condo or have recently done major projects and your balance is projected to be healthy for at least five years, then you can wait until your regularly scheduled update. However, everyone should calculate how much HST will effect the reserve fund contribution, and add that extra amount each year until you get your update. How do you calculate that? See Thompson’s table below to help you come up with that number.

Dean McCabe, Regional Manager for Brookfield Residential

Sally Thompson, National Practice Leader for property condition assessment services at Halsall Associates Limited

Richard Senechal, manager of CG Maintenance