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How a 220sf Condo Got 724% Return in 5 Years

It’s March break.  Between losing one hour of sleep and driving the kids around, I’m deep into tax season reviewing files and answering clients’ questions.

It’s busy and difficult.  We’re super grateful that the local Burlington Mall has so many activities to offer.  Our kids even got to take pix with their favourite cartoon characters.  😉

Today, I would like to take this opportunity to introduce you to one of my best friends and our new’ish member on our team.  She joined us last November.

Verna is a Chartered Accountant.  She was my mentor when I started my co-op work term.  We were both working at the same firm.  She sat across from me teaching me the difference between tax credit and a tax deduction. 

She’s worked at KPMG, one of the biggest accounting firms in the world.  She’s got a few years of experience at the Asian branch of a large Canadian mutual funds/insurance company.

She’s got two young kids too. 

Like most parents, Verna and her husband, Tony, wanted the best for their children.  They came back to Canada last year to pursue a better life for their children. 

Verna is also a real estate investor.  Her investment property is a bit unusual in Canadian sense.  Her property is a 220 sf condo in Hong Kong.

Yes, a 220 sf condo!

It is a one bed, one bath layout with a kitchen as well.

You can see from the videos below how small the kitchen and the bedroom are. 

She was earning approximately CAD$2K a month rent from this property.  It’s located really close to Hong Kong University, one of the top universities over there.

Her place is also near a subway station (remember, public transit is a factor?). 

Verna and Tony bought their property for CAD$468K 5 years ago.  It is worth $830K today. 

If you wonder how she would cash flow from the property, she is roughly around break even after paying 50% downpayment.  😉

She’s not really cash flowing if she counts the second mortgage she took out on her primary residence for the 50% downpayment.  😉

She really started with a $50K cash investment.

If you take the $362K appreciation, divided by the initial cash investment $50K, return on investment is over 7 times in the last 5 years.  In Hong Kong, you also don’t need to pay capital gain tax.  So 100% belong to them. 

Not too shabby an investment, eh?

If you ever wonder how she’s going to be taxed in Canada since she bought this property before she moved back…

1. A valuation would have to be done at the time when they “moved back” to Canada.

The capital gain they’ve made until the point of entry to Canada would not be taxed by CRA. 

But any capital appreciation from the day they come back to eventual sale would be taxed locally in Canada.

Say when they eventually sold the property for $1M.  At the time when they moved back to Canada, the property was worth $830K.  The capital gain of $170K would be taxed as capital gain in Canada.

50% of the $170K is taxable, so $85K is a taxable amount. 

Canadian tax residents are taxed on their worldwide income, unfortunately.

2. What about rental income and expenses?

Rental income and expenses have to be reported on this property.  All eligible expenses that a regular Canadian tax resident would take on their Canadian property are also eligible for deductions.

They’re also required to file a local tax return in Hong Kong.  If they end up paying some amount of local taxes, they may be able to claim a tax credit on their Canadian tax returns.

Canadian governments have a tax treaty with various countries so that the taxpayers who are earning foreign income do not have to pay as much double tax in two jurisdictions.

3. T1135 foreign income verification form

In addition to that, they will also have to file the T1135 foreign income verification form.  This form is designed for people who own investments outside of Canada. 

They will have to report the income and expenses, the value of the property, etc. and it is filed as part of your personal filing annually. 

If you ever thought that prices are too high in today’s market, think again.  As a Canadian investor, I would not pay $468K for a 220 sf condo, this is over $2K per sf, in today’s market.  Let alone five years ago.

It’s crazy how population growth kept pushing the price higher and higher. One day, $3,630 per sf can be the new normal.

Until next time, happy Canadian Real estate investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

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