In Liu v. The King, 2026 TCC 126, the Tax Court struck specific paragraphs from the Crown’s pleadings that advanced a Foreign Accrual Property Income (FAPI) basis under section 91 of the Income Tax Act, on a motion decided under the “plain and obvious” test. The Court held that subsection 152(9) could not be used to support the existing assessments with a FAPI basis that depended on transactions and foreign-corporation income not considered in the original assessments. The required factual foundation was new, not merely a different legal characterization of amounts already assessed. This is a pleadings ruling on what the Crown may argue at the upcoming hearing — it is not a finding on whether the family actually has unreported FAPI, and the Court explicitly left open whether the Crown could pursue the issue by some other route.
The Background
The appellants — Amy Ying Jun Liu and her parents, Jia Bin Liu and Lian Di Liu — were reassessed for the 2013–2017 taxation years based on unreported amounts identified in their bank accounts. The Minister’s original assumptions were that the family owned shares in offshore corporations and that those corporations gave rise to unreported employment income, business income, and capital gains. The Minister also assessed gross negligence penalties and noted a failure to file Form T1135 for specified foreign property (paras 8–10).
The Minister did not assess the appellants under FAPI. The Crown’s original Replies, filed in July 2022, already pleaded — in the alternative — that the family should have been assessed under section 91(1) on their share of FAPI earned by “controlled foreign affiliates,” relying on subsection 152(9) of the Income Tax Act. Amended pleadings filed later in the litigation expanded the supporting facts and identified additional foreign corporations said to be controlled foreign affiliates, and examinations for discovery took place after those amendments. The appellants moved to strike the FAPI-related paragraphs, on the basis that the underlying issue — income earned by separate foreign corporations that had not formed part of the Minister’s original assessment — was new to the assessment itself, not an argument first introduced only after discovery (paras 13–17).
The Legal Question: What Does Subsection 152(9) Actually Allow?
Subsection 152(9) lets the Minister raise an alternative argument or basis in support of an existing assessment after the normal reassessment period has expired, provided the total tax payable doesn’t increase. It was enacted after the Supreme Court’s decision in Continental Bank limited the Minister’s ability to raise new bases late, and was amended in 2016 — following the Federal Court of Appeal’s decision in Canada v. Last, 2014 FCA 129 — specifically to allow the Minister to point to a different source of income within the same overall assessment (paras 31–37).
Justice Clark’s analysis drew a precise line: the 2016 amendment allows a new legal argument or basis — including recharacterizing already-assessed amounts as arising from a different source — but it does not extend to entirely new transactions involving income earned in the first instance by separate foreign corporations, requiring a new factual and transactional foundation that had not formed part of the assessment (paras 56, 64). FAPI is not simply a relabeling of the same unreported amounts; it is a statutory attribution mechanism that first requires determining the income earned by a controlled foreign affiliate — a different legal person — which the Minister had never assessed or made assumptions about (paras 50–56). On that basis, the Court found it plain and obvious the Crown’s FAPI pleading could not succeed as pleaded, and struck the specific paragraphs identified in the Order (paras 79, 86).
What the Decision Does Not Say
Three limits are worth being explicit about, because they’re easy to lose in a short summary.
First, this was a motion to strike, decided on the “plain and obvious” test from the Supreme Court’s Imperial Tobacco decision — a screening mechanism for pleadings, not a trial on the merits. The Court was required to assume the pleaded facts were true and ask only whether the Crown’s FAPI argument had any realistic chance of succeeding as framed (paras 21–25).
Second, the Court expressly declined to decide whether the Crown could pursue the FAPI issue in another manner. The reasons discuss paragraph 152(4)(b.2), but whether a fresh reassessment would be valid would depend on that provision’s requirements, the relevant years, and any applicable limitation issues (paras 74, 76–80). The ruling does not hold that CRA can never raise FAPI in relation to these taxpayers; it holds that this pleading, in this form, at this stage cannot stand.
Third, the decision says nothing about whether the family does or doesn’t have FAPI exposure on the merits. That question was never reached.
Why This Still Matters for Cross-Border Files
Audits that begin with one issue — unreported income, a T1135 failure — can expand over time into foreign affiliate and FAPI territory as CRA’s information gathering continues. Liu signals that once an assessment has been made and the normal reassessment period has passed, there are real limits on how far the Crown can stretch that assessment through amended pleadings alone, particularly where doing so relies on a proposed basis that depends on income earned by separate foreign corporations and transactions that were not part of the original assessments. For taxpayers and advisors, the practical implication is to treat T1134 foreign affiliate reporting and related documentation as something to get right from the outset — the procedural protection here is narrower and more technical than “CRA can’t raise this,” and shouldn’t be relied on as a substitute for accurate reporting.
FAQ
Did the Tax Court decide the Liu family doesn’t owe tax on FAPI?
No. This was a motion to strike specific pleadings, decided on a “plain and obvious” test. The Court did not decide, and was not asked to decide, whether the family has FAPI exposure on the merits.
Can CRA never raise a FAPI argument after the normal reassessment period?
It’s not that simple. The Court found this specific attempt improper because it relied on an entirely new set of transactions involving income earned in the first instance by separate foreign corporations, requiring a new factual and transactional foundation that had not formed part of the assessment. The Court expressly left open whether the Crown could pursue the same issue through a different procedural route.
What’s the difference between a new “argument” and a new “basis” under subsection 152(9)?
The amended provision allows the Minister to advance new legal arguments or point to a different source of income within an amount already assessed. In this case, it did not permit a new FAPI basis that depended on transactions and income earned by separate foreign corporations that had not formed part of the original assessments.
What is the “plain and obvious” test?
It’s the standard used on a motion to strike pleadings: assuming the pleaded facts are true, is it plain and obvious the claim (or argument) has no reasonable chance of success? It comes from the Supreme Court’s decision in R v Imperial Tobacco Canada Ltd, 2011 SCC 42.
Does this decision affect T1135 or T1134 filing obligations?
The decision does not determine any T1134 or T1135 filing obligation. The underlying reassessments included a T1135 filing issue, while the struck pleadings concerned substantive FAPI inclusions under section 91.
If a cross-border audit expands to include FAPI, what should a taxpayer do?
Get advice promptly, and ensure the taxpayer’s foreign affiliate structure and T1134 filing history are well documented. Whether a FAPI basis that was not reflected in the original assessment can later support the assessment will depend on exactly how it is pleaded, the underlying transactions, and the applicable reassessment rules.
Practical Takeaways
- This was a pre-trial pleadings ruling, not a decision on FAPI liability — the underlying question of whether the family owes tax on FAPI was never decided.
- In this case, subsection 152(9) did not permit the Crown to support the existing assessments with a FAPI basis that depended on transactions and foreign-corporation income that had not formed part of the Minister’s assessment.
- The Court left open whether the Crown could still pursue the same substantive issue through a different procedural route, such as a fresh reassessment.
FAPI and cross-border audit issues are one part of a broader international tax practice; see our Canadian International Tax Services for the complete picture.
Facing an Expanding Cross-Border Audit or FAPI Issue?
Foreign affiliate and FAPI issues can involve both substantive tax and procedural questions. Lepore & Company assists taxpayers and their advisors with T1134 reporting, CRA audit responses and objections, and supporting documentation.
This article discusses a single interlocutory Tax Court of Canada ruling (a motion to strike) and is provided for general informational purposes only. It does not constitute legal, tax, or accounting advice, and it should not be read as a final determination of any party’s FAPI liability. Please contact Lepore & Company or a qualified professional to discuss your specific circumstances.