Larocque Family Trust – Court of Quebec finds that s. 160 can apply to a s. 227.1 liability of a director who was not assessed therefor until well after the subject transfer

An individual (Larocque) was a director of a corporation (Construction LMA), engaged in the development of residential projects. Two days after the ARQ had issued a statement of account to Construction LMA showing that it had failed to remit over $527,000 in sales taxes and employee source deductions, Larocque transferred his residence, which was mortgaged to a bank to secure debt owing to the bank by Construction LMA, to a newly formed trust (of which he was the beneficiary and one of the two trustees) in consideration for the assumption of the bank debt.

Two years later, the ARQ assessed Larocque under the Quebec equivalent of s. 227.1 and, a month later, it assessed the trust under the Quebec equivalent of s. 160, based on the extent to which the fair market value of the residence exceeded the amount of the assumed debt.

Tremblay JCQ, noted that, in fact, Larocque had continued to service the bank debt, so that the consideration received by him from the trust for the transfer by him was “purely fictitious” and that the purported assumption of the bank debt was a “sham”. However, the ARQ could not now reverse its assessing position, as “the determination of the value of the consideration must be made at the time of the transfer”. However, he noted that the ARQ might nonetheless consider the payments that continued to be made by Larocque to service the bank debt were further transfers by Larocque to the trust for s. 160 purposes, although this issue was not before him and he was not passing on it.

In rejecting the argument of the trust that it should not be liable under s. 14.4 for the director's liability of Larocque that had not been assessed until two years after the transfer of the residence, Tremblay, JCQ, in following, inter alia, Colitto, stated:

In summary, in a case involving the application of [the s. 227.1 equivalent], it is not the assessment itself that gives rise to the tax debt of a corporate director. Under this provision, when the conditions for applicability are met, the tax debt of the director retroactively arises on the date of the corporation's failure to meet its tax obligations.

Accordingly, the trust assessment was confirmed.

Neal Armstrong. Summary of Larocque (Fiducie familiale Larocque) v. Agence du revenu du Québec, 2025 QCCQ under s. 160(1).