Liu et al v The King and the Limits on Alternative Arguments in Tax Court Pleadings
The Tax Court strikes the CRA’s attempt to plead a foreign accrual property income theory that was never part of the original tax reassessment, reaffirming firm limits on what subsection 152(9) permits.
Liu et al v The King, 2026 TCC 126 (Tax Court of Canada, General Procedure), Clark J., Docket No. 2022-961(IT)G, decided July 2, 2026.
Overview: How Liu et al v The King Limits the CRA’s Ability to Plead a New FAPI Basis of Tax Assessment
The Tax Court of Canada’s decision in Liu et al v The King confirms an important procedural protection for taxpayers facing a CRA tax reassessment. Once the CRA has issued a tax reassessment on a particular factual basis, the Canadian tax lawyer acting for the CRA cannot later use pleadings in a Tax Court appeal to introduce an entirely new theory of tax liability built on a different set of transactions, particularly one involving offshore corporations and foreign accrual property income that was never considered at the tax reassessment stage.
The court struck the CRA’s alternative pleadings, reaffirming that subsection 152(9) of the Income Tax Act permits the CRA to raise new arguments in support of a tax assessment, but does not permit the CRA to reassess by stealth through its reply.
Key Takeaway
The CRA cannot use a Tax Court reply to introduce a new basis of tax liability built on transactions and facts it never assumed when it originally reassessed. In Liu et al v The King, the CRA’s belated attempt to assess FAPI arising from offshore corporate holdings was struck because it depended on an entirely different set of facts than those underlying the original tax reassessments. Taxpayers facing a tax reassessment on one issue should not assume the scope of a later Tax Court dispute is limited to arguments the CRA could have made on the facts it actually assessed.
Background: The Family Tax Reassessments, the Missing FAPI Assumptions, and the CRA’s Late-Breaking Reply
The taxpayers in Liu et al v The King were members of the same family. The CRA issued tax reassessments against each of them for various taxation years between 2013 and 2017, with some of the tax reassessments made outside the normal reassessment period. Notably, none of the tax reassessments, and none of the confirmations that followed, were based on the proposition that the taxpayers held an interest in foreign accrual property income, commonly known as FAPI, earned through offshore corporations. The CRA’s original assumptions of fact said nothing about controlled foreign affiliates or FAPI at all.
The taxpayers objected and ultimately appealed to the Tax Court. It was only in the replies to the notices of appeal that a materially different theory appeared. The Canadian tax lawyer acting for the CRA asserted in the replies that certain foreign corporations were controlled foreign affiliates of the taxpayers and that foreign income earned by those corporations constituted FAPI attributable to the taxpayers for the years in issue. The taxpayers later consented to amended replies that added the FAPI question and pleaded further supporting facts, but they preserved their right to challenge the CRA’s ability to raise the issue at all. That challenge came before the court as a motion to strike the FAPI paragraphs.
Key Issues and Findings: Why the Tax Court Struck the CRA’s FAPI Pleadings Under Subsection 152(9)
The taxpayers argued that the Canadian tax lawyer acting for the CRA was not simply defending the existing tax reassessments with an alternative legal argument, but was instead advancing an entirely new basis of tax liability arising from a different set of transactions than those ever considered when the tax assessments were made. On the taxpayers’ view, allowing the CRA to plead FAPI for the first time in a reply would let the CRA use the Tax Court appeal as a vehicle to assess something that was never assessed, confirmed, or even contemplated administratively. That, they said, exceeds what subsection 152(9) of the Income Tax Act and section 53(1) of the Tax Court of Canada Rules (General Procedure) permit.
The Tax Court agreed with the taxpayers and granted the motions to strike. Justice Clark grounded her reasoning in the Federal Court of Appeal’s earlier decision in Walsh (2007 FCA 222), which held that the pre-2016 version of subsection 152(9) did not permit the Minister to include in an alternative argument transactions that did not form the basis of the taxpayers’ reassessment. She found that the 2016 amendments expanding subsection 152(9) should be construed narrowly, on the footing that Parliament is taken to have known of that limiting jurisprudence when it legislated.
“I find it plain and obvious that amended subsection 152(9) does not enable the Minister to raise new arguments and bases arising from an entirely new set of transactions. An assessment of tax liability under the FAPI rules requires a determination of the income of a Canadian taxpayer’s foreign affiliates. The Minister made no such […] determination […] prior to reassessment.”
— Clark J., Liu et al v The King, 2026 TCC 126
David Rotfleisch observes:
“As a Certified Specialist in Taxation, I look at FAPI cases like this one and the missing step is always the same: nobody actually computed the foreign affiliate’s income before the CRA tried to attribute anything to the Canadian taxpayer. Without that computation, there is no FAPI assessment to defend, only a theory.”
— David J. Rotfleisch, Certified Specialist in Taxation
The court found that the CRA had made no such determination before issuing the original tax reassessments. There was no assumption in the tax reassessments that any of the offshore corporations were controlled foreign affiliates, no computation of their income, and no attribution of FAPI to any of the taxpayers. The FAPI theory pleaded in the replies did not merely recharacterize the same transactions under a different legal label. It rested on an entirely different set of transactions, involving different though affiliated taxpayers, and transactions that took place outside Canada. In other words, the Canadian tax lawyer acting for the CRA was not defending the tax reassessment that had been made. The CRA was attempting to justify the tax owing by reference to a different basis of liability altogether.
The court’s decision reflects the well-established distinction between permitting the CRA to raise a new argument in support of an existing tax assessment, which subsection 152(9) allows subject to prejudice considerations, and permitting the CRA to advance what is functionally a new tax assessment dressed up as an argument. The FAPI paragraphs fell on the wrong side of that line, and the court struck them from the replies.
Implications: The Boundaries of Subsection 152(9) for CRA Tax Reassessments and Alternative Arguments
Subsection 152(9) of the Income Tax Act gives the CRA meaningful latitude. It allows the CRA to advance an alternative argument in support of a tax assessment at any time, including after the normal reassessment period has expired, provided there is a sufficient factual foundation on the record and the taxpayer is not unfairly prejudiced by the timing. This provision exists so that a tax reassessment already made is not vulnerable to being overturned simply because the CRA’s original legal characterization was imperfect.
What subsection 152(9) does not do is authorize the Canadian tax lawyer acting for the CRA to use a Tax Court reply as a substitute for a fresh tax reassessment. Courts have consistently distinguished between a new argument grounded in the same underlying transactions the CRA already assessed, which is permissible, and a new basis of tax liability arising from different transactions or different facts that were never assumed at the time of assessment, which is not.
“Subsection 152(9) was never meant to give the CRA a second bite at the apple using a completely different set of facts. If the CRA wants to assess FAPI, it has to do the work of a FAPI tax assessment, including determining the foreign affiliate’s own income, before it reassesses. It cannot skip that work and then try to plead its way into the same result once the matter is already in Tax Court.”
— David J. Rotfleisch, Certified Specialist in Taxation
Liu et al v The King applies this distinction squarely to an international tax context, and it does so in a setting where the stakes of getting the line right are especially high. FAPI liability depends on a chain of determinations, corporate residence, control, the foreign affiliate’s own income computation, and attribution, none of which the CRA had undertaken before the tax reassessments were issued. Permitting that entire analytical chain to be introduced for the first time in a pleading would have effectively allowed the CRA to reassess outside the statutory reassessment framework altogether.
This decision sits alongside a broader body of case law constraining how far the CRA, and the Canadian tax lawyer acting for the CRA, may go procedurally without proper administrative groundwork. The predominant purpose framework established in R v Jarvis similarly polices the boundary between the CRA’s ordinary administrative powers and conduct that requires a different, more rigorous process; our discussion of the line between a CRA tax audit and a criminal tax investigation under R v Jarvis explores a parallel line-drawing exercise in a different procedural context.
Takeaways: What Liu et al v The King Means for Taxpayers With Offshore Corporate Holdings
- The CRA cannot introduce a new basis of tax liability through a Tax Court reply if that basis depends on transactions and facts never assumed in the original tax reassessment.
- A FAPI tax assessment requires the CRA to first determine the foreign affiliate’s own income; skipping that step before reassessing cannot be cured later through pleadings.
- Subsection 152(9) permits new legal arguments grounded in the same facts already assessed, not new bases of liability grounded in different facts.
- Family groups with shared offshore corporate holdings should not assume a CRA tax reassessment against one relative forecloses a broader claim against others without its own factual foundation.
- Taxpayers who receive a CRA reply introducing new corporate structures or new categories of income should have it reviewed promptly, since a motion to strike is most effective early in the litigation.
Pro Tax Tips: Protecting Yourself From an Expanded CRA Tax Reassessment or FAPI Tax Assessment
Taxpayers with offshore corporate holdings should not wait for a CRA reply to discover whether a FAPI issue is in play. Controlled foreign affiliate status and FAPI attribution should be assessed proactively, before a CRA tax audit escalates into a tax reassessment, so that any exposure can be addressed through proper channels rather than contested procedurally after the fact.
“Families who hold shares in offshore corporations together often assume that whatever the CRA assessed one relative on is the whole story. This decision is a reminder that it usually isn’t, and that families in this position should get ahead of a FAPI question rather than wait to see whether the CRA discovers it later and tries to plead it into an existing appeal.”
— David J. Rotfleisch, Certified Specialist in Taxation
Where a tax reassessment has already issued on one basis, taxpayers should scrutinize any reply carefully for signs that the Canadian tax lawyer acting for the CRA is attempting to introduce facts or transactions that were never part of the original tax assessment. A precisely drafted notice of appeal, paired with prompt motions practice where warranted, preserves the taxpayer’s ability to hold the CRA to the basis on which it actually assessed. Taxpayers who suspect they may have unreported FAPI exposure of their own, separate from any CRA tax reassessment, should consider whether a voluntary disclosure is appropriate before the CRA identifies the issue independently; our overview of using the Voluntary Disclosures Program to address unreported offshore and crypto-related income explains the mechanics of that process.
Family groups that hold shares in offshore corporations through several related individuals should also be conscious that the CRA may attempt to treat facts relevant to one family member’s structure as relevant to another’s. As Liu et al v The King shows, the CRA cannot simply import an argument built around one set of relationships onto tax reassessments of affiliated taxpayers without its own proper factual foundation for each of them. Anyone navigating a cross-border family ownership structure, or considering a move that touches on Canadian tax residence, should also review our guide for understanding Canadian tax residence and the sojourner rule, since residence determinations often sit upstream of any FAPI analysis.
Finally, taxpayers who are reassessed outside the normal reassessment period, whether on a FAPI basis or otherwise, should not assume the CRA’s timing is automatically valid.
- The CRA bears its own burden in relying on the extended reassessment period, a principle that applies equally in the GST/HST context, as explained in our discussion of when the CRA can reassess GST/HST returns beyond the normal statute-barred period, and gross negligence penalties frequently travel alongside these disputes.
- Our discussion of how appellate courts have vacated gross negligence penalties where the CRA’s evidence did not actually support the tax assessment is a useful companion piece for taxpayers facing tax reassessments built on a thin evidentiary record.
- Taxpayers with unreported foreign affiliate holdings who have not yet filed the required T1134 information returns, and who wish to come forward before the CRA raises the issue independently, should review our discussion of the Canadian Voluntary Disclosure Program, including its treatment of unfiled T1134 and T1135 information returns.
Frequently Asked Questions: FAPI, Subsection 152(9), and CRA Tax Reassessment Procedure
What is foreign accrual property income, or FAPI?
FAPI is a category of passive or investment-type income earned by a foreign affiliate of a Canadian resident taxpayer, such as interest, rents, royalties, and certain other types of income, which is attributed back to the Canadian resident and taxed in Canada on an accrual basis, even though the income was never actually distributed to the Canadian taxpayer. The FAPI rules exist to prevent Canadian residents from sheltering passive income in low-tax foreign jurisdictions through offshore corporations.
What does it mean for the CRA to raise an alternative argument under subsection 152(9)?
Subsection 152(9) allows the CRA to support a tax assessment that has already been made using a new legal argument, even one raised after the normal reassessment period has expired or after litigation has begun, provided there is a sufficient evidentiary foundation and the taxpayer is not unduly prejudiced by the late timing. It is meant to let the CRA correct the legal characterization of a tax assessment, not to introduce a wholly new basis of tax liability.
Why did the court strike the FAPI paragraphs from the CRA’s replies in this case?
The court found that the FAPI argument was not simply an alternative characterization of the same transactions already assessed. It depended on an entirely different set of transactions involving offshore corporations, different though related taxpayers, and activity occurring outside Canada. Because the CRA had never made the underlying determination of the foreign affiliates’ income before issuing the tax reassessment, the FAPI theory amounted to a new basis of tax liability rather than a permissible alternative argument.
Can the CRA ever add a FAPI argument to an existing appeal?
It depends on whether the FAPI argument arises from the same transactions and factual assumptions already underlying the tax reassessment. Where the CRA’s original tax assessment already contemplated the relevant foreign affiliate relationships and the CRA is simply refining its legal position, subsection 152(9) may permit the new argument. Where the FAPI theory depends on facts about controlled foreign affiliates and their income that were never assessed or assumed, as in Liu et al v The King, the proper course is a fresh tax reassessment rather than an amendment to the pleadings.
What should a taxpayer do if the CRA’s reply introduces a new theory not found in the original tax reassessment?
A taxpayer in that position should have the reply reviewed promptly by an experienced Canadian tax litigation lawyer to assess whether a motion to strike is appropriate. Timing matters, since a motion to strike is generally most effective when brought early in the litigation, and the taxpayer should also consider whether consenting to an amended reply, as occurred earlier in this litigation, might inadvertently affect the taxpayer’s ability to later challenge the new argument.
Does this decision affect how far back the CRA can go in reassessing FAPI issues?
The decision does not change the statutory reassessment periods themselves. It confirms that the Canadian tax lawyer acting for the CRA cannot use pleadings in an existing appeal as a workaround for the tax reassessment process, including the requirement to justify reassessing beyond the normal period. Where the CRA wishes to pursue a FAPI issue that was not part of the original tax reassessment, it must do so through a proper tax reassessment, subject to the ordinary rules governing the CRA’s ability to reassess outside the normal period.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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