Background
The Appellants—a family consisting of Amy Ying Jun Liu, Jia Bin Liu, and Lian Di Liu—were reassessed by the Minister of National Revenue for multiple taxation years. The Minister identified amounts in their bank accounts and assumed they owned shares in offshore corporations generating unreported income in the form of employment income, business income, and capital gains. Critically, the Minister made no assumptions concerning income earned by the foreign corporations themselves and included no Foreign Accrual Property Income (FAPI) in the original reassessments.
After the normal reassessment periods expired and the Appellants objected, final reassessments were issued on January 6, 2022, without any FAPI assessment. However, the Crown subsequently filed amended and further amended replies arguing that the Appellants were required by subsection 91(1) of the Income Tax Act to include FAPI in their tax liability. The Appellants moved to strike the paragraphs supporting this alternative FAPI argument, contending that subsection 152(9) does not permit the Crown to raise alternative arguments based on entirely new transactions not part of the original assessment.
The Court’s Holding
Justice Clark granted the motion and struck the impugned paragraphs. The court held that amended subsection 152(9) of the Income Tax Act does not permit the Minister to advance an alternative FAPI argument when the original assessment did not include FAPI and the argument is based on entirely new transactions involving foreign affiliates that were not considered in the initial assessment.
The court emphasizes that FAPI is a statutory attribution mechanism—not a traditional “source of income”—that attributes a foreign affiliate’s income to a Canadian resident shareholder. The court found it “plain and obvious” that the Crown cannot succeed with the FAPI argument under subsection 152(9) because the transactions giving rise to FAPI formed no part of the Minister’s original assessment. While the 2016 amendments broadened subsection 152(9) to permit alternative arguments invoking different sources of income for the same transactions, Parliament deliberately did not expand the provision to permit arguments based on entirely new transactions or income earned by other parties.
The court rejected the Crown’s argument that the term “basis” added in the 2016 amendments signals authority to advance arguments based on new factual circumstances or new transactions. Instead, the court determined that “basis” refers to legal basis, consistent with earlier jurisprudence and the legislative history. Parliament, having been aware of prior case law limiting subsection 152(9) to transactions forming the basis of the original assessment, chose not to broaden this limitation, signaling an intent to address only the narrow issue raised in Last v. The King.
Key Takeaways
- Subsection 152(9), even in its amended form post-2016, restricts alternative arguments to transactions that formed the basis of the original assessment; it does not permit reliance on entirely new transactions or parties
- FAPI is an attribution mechanism distinct from traditional sources of income, and an assessment thereof requires determination of a foreign affiliate’s income—a determination the Minister never made initially
- The 2016 amendments to subsection 152(9) were narrowly tailored to overturn Last v. The King on the specific issue of alternative arguments invoking different sources for the same transactions; they do not signal broader expansion
- The Crown cannot effectively impose a new basis of assessment after limitation periods expire by framing it as an alternative argument under subsection 152(9)
Why It Matters
This decision provides critical guidance on the scope of the Crown’s authority to raise alternative arguments after normal reassessment periods expire. Although the 2016 amendments to subsection 152(9) expanded the Crown’s flexibility to defend assessments with alternative legal bases, this decision clarifies that the provision has meaningful limits: it does not permit the Crown to construct an entirely new argument premised on facts and transactions never examined during the original assessment. The ruling protects taxpayers from having effective new assessments imposed through the back door of alternative pleading after statutory limitation periods have closed.
For practitioners, the decision confirms that a motion to strike alternative arguments may succeed where those arguments depend on transactions outside the original assessment’s scope, particularly where new parties or foreign transactions are implicated. The court’s close attention to statutory text, legislative history, and the principle against broad statutory change without explicit direction proves instructive in interpreting tax legislation.