For decades, Canada’s tax system has wrestled with the challenge of taxing capital gains fairly. Our current approach taxes gains only when realized, creating distortions: wealthy investors can indefinitely defer taxes on liquid financial assets, while ordinary Canadians face sudden tax spikes when they sell a home, a rental property, or shares in a family business. To correct these inequities, governments have experimented with “anti-deferral” regimes — such as section 94.1 of the Income Tax Act for offshore investment funds — and other countries, notably the United States, have developed the Passive Foreign Investment Company (PFIC) rules. Both regimes recognize the core principle: tax deferral is not a free loan, and fairness requires either annual accrual or an interest charge when gains are deferred.
OADRI generalizes this principle for all capital gains in Canada. Under OADRI, taxpayers have a clear choice:
- Accrual: declare and pay tax annually on accrued gains, avoiding interest.
- Deferral: wait until realization, but pay tax as if the gains had been earned steadily over the holding period, with arrears interest applied. The interest rate follows the same formula already used by the CRA for unpaid taxes: the 90-day Treasury Bill rate plus 4%, compounded daily. This ensures that deferral is never a free loan, but rather a transparent borrowing arrangement with the government.
For ordinary Canadians, this means stability. Modest-income households who sell a long-held property or family business will see their gains averaged over the years, preventing sudden jumps into the top bracket. They will often be encouraged to pre-pay annually to avoid the interest charge, but if cash flow is tight, they can safely defer. They are never forced into premature liquidation simply because they lack access to credit.
For the wealthy, OADRI is functionally identical to a wealth tax. Each year, appreciation on their assets must be financed — either by paying annual accrual tax, or by deferring and allowing the government to charge interest on the unpaid balance. Because wealthy households can always borrow against their portfolios, they face no liquidity constraint in either case. Whether they borrow privately to pay now or implicitly borrow from the government by deferring, their lived experience is the same: a steady annual drain on wealth, just as under a wealth tax.
The difference lies not in the effect on the wealthy but in the effect on everyone else. For middle-class Canadians, OADRI preserves the security of realization-based taxation: you owe nothing until you sell. Yet it smooths your gains across the years, preventing sudden spikes into top tax brackets. OADRI therefore combines the distributive logic of a wealth tax at the top with the liquidity protection of realization for the middle, in a single, coherent regime.
OADRI is not a radical departure but a modernization. It extends principles already embedded in Canada’s offshore property rules and harmonizes with international practice in the United States and elsewhere. By adopting OADRI, Canada can eliminate distortions like the Principal Residence Exemption without punishing mobility or liquidity, align the tax system with fairness and fiscal responsibility, and restore confidence that capital gains are taxed in a way that is both equitable and sustainable.
Bought for $100,000 in 1995, sold for $700,000 in 2025 → $600,000 gain.
- Current regime: Entire gain recognized in 2025. With 50% inclusion, $300,000 taxable. This spikes income into the top bracket; effective tax ≈ $120,000 (20% of the gain).
- OADRI (pre-pay annually): Gains spread evenly over 30 years, about $10,000 per year ($5,000 taxable). Taxed at typical 25–30% effective rates, the family pays about $90,000 in total.
- OADRI (defer): If they wait and pay all at once, CRA charges arrears interest (≈20% uplift). Total ≈ $108,000. Still lower than current regime, but higher than if they had paid as they went.
- Key insight: A family with steady rental income has the cash flow to pre-pay annually, saving ~$30,000 compared to waiting.
Portfolio: $10M compounding at 5% over 10 years → $6.3M gain. Investor earns $1M salary each year (top bracket), retires in year 11.
- Current regime: By deferring until retirement, they sell gradually at a 25% average effective rate. With 50% inclusion, tax ≈ $790,000.
- OADRI (pre-pay annually): Each year’s slice is taxed while the investor is working, at top rates. Effective tax ≈ $1.57M in total — about double the current regime.
- OADRI (defer): Waiting until year 10 means the same $1.57M base, plus arrears interest, raising the total even further.
- Key insight: Paying annually locks in high-income years. Deferring only makes it worse, because the interest charge stacks on top. Under OADRI, the wealthy lose both the deferral benefit and the retirement arbitrage.
Bought in 1995 for $200,000, sold in 2025 for $1M → $800,000 gain.
- Current regime: Entirely exempt under the Principal Residence Exemption. $0 tax.
- OADRI (pre-pay annually): Gains spread across 30 years (~$13k per year, $6.5k taxable). At ~30% effective tax, the family pays about $120,000 total.
- OADRI (defer): If they wait until sale, interest adds ~20% uplift. Total ≈ $144,000.
- Key insight: Families with modest incomes might prefer to defer for simplicity, but those who choose to pre-pay save ~$24,000.
| Scenario | Current Regime | OADRI (Pre-Pay) | OADRI (Defer) | Key Effect |
|---|---|---|---|---|
| Rental property (modest-income) | $120,000 | $90,000 | $108,000 | Pre-paying saves ~$30k; avoids bracket spike |
| Wealthy portfolio ($10M, 5% growth, 10y) | $790,000 | $1,570,000 | $1,570,000+ | No deferral or retirement arbitrage; interest makes deferral worse |
| Principal residence (Toronto) | $0 | $120,000 | $144,000 | PRE gone; pre-paying saves ~$24k |