In the case of contingency funds, a syndicate of co-owners must have guidelines for the investment of the sums accumulated in the fund. It must clearly define the return and risk objectives for a given period while taking into account constraints such as liquidity needs, the legal context and exceptional circumstances. This task is delicate, because a syndicate of co-owners acts as administrator of the property of others. That is why it must submit to restrictive and precautionary rules on placement. The syndicate is thus subject to the rules of presumed safe investments provided for in articles 1339 to 1344 of the Civil Code of Quebec.
Article 1071 of the Civil Code of Quebec provides that the contingency fund must be partly liquid, available in the short term and its capital must be guaranteed. This therefore excludes any speculative investment. Board members must align investments based on the forecasts of a contingency fund study. In addition, they must restrict their choices to investments that are presumed safe within the meaning of article 1339 of the Civil Code of Quebec. The amounts invested must not fluctuate but remain guaranteed for the duration of the investment (and not only at maturity). The money must be returned on request or within a maximum period of 30 days, unless the amount is guaranteed by the Autorité des marchés financiers (maximum of $100,000 per account and per financial institution).
Financial institution and liability
Article 1341 of the Civil Code of Quebec provides that the sums of money must be deposited in a bank, a savings and credit union or another financial institution, if the deposit is refundable on sight or on a notice of not more than 30 days. For deposits of more than 30 days, they are allowed if the refund is fully guaranteed by the Autorité des marchés financiers.
Thus, when the board of directors makes such an investment, the amounts should be:
Nature of investments
Article 1071 of the Civil Code of Québec provides that the contingency fund is the property of the syndicate and its use is determined by the board of directors. It is therefore up to the directors to determine the nature of the investments. These should be made according to the expected return and capital gain and, as far as possible, by diversifying the portfolio between fixed and variable income.
The contingency fund must be managed with the objective of generating a sufficient return, while maintaining the value of the property. Thus, the investment of the sums allocated to the contingency fund cannot be speculative. Indeed, the sums must be invested in a safe manner, in order to avoid any loss ("the capital must be guaranteed"). For this reason, board members must act prudently and diligently, investing the money they administer in accordance with the rules on deemed safe investments.
Investment income can still cover part of the amount of major repairs and replacement of common elements. Investment policy should therefore seek a balance between:
Moreover, since interest is not subject to income tax because of its conservative nature, it is not in the board of directors' interest to choose investments that are too risky.
Finally, the investment chosen must take into account the foreseeable evolution of the rate of inflation, since the rate of return varies with inflation.
Faced with all these parameters, it would be appropriate for the board of directors to use the services of a financial advisor as part of a study of the contingency fund, whose mission would be to propose the most relevant investments according to the needs of the syndicate and all its inherent constraints. The choice of investments would therefore be made according to:
WHAT YOU SHOULD KNOW ! The sums accumulated in the contingency fund must be deposited in a financial institution, and part of these sums must remain liquid and available in the short term, that is to say, accessible on 30 days' notice. For example, the syndicate can invest in the longer term the sums it holds for the repair of a roof that must be redone in twenty years.
WHAT TO KEEP IN MIND : Since the money must be invested conservatively, the prudent director will not invest the syndicate's funds in investments that are at risk or whose capital may decrease. In addition, it is necessary that the sums invested appear in the contingency fund account, separate from the general account of the syndicate.
WARNING ! The board of directors must not at any time invest the syndicate's funds in risky investments or the capital may decrease. Article1339 C.c.Q.contains a list of investments presumed to be safe. The board will have to choose from this list.