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Chinese hotpot chain sues consulting firm after $250K tax penalty, raid

Liuyishou Hot Pot opened its first North American location in Richmond almost 10 years ago.
Chinese hotpot chain Liuyishou opened its first North American location in Richmond almost 10 years ago.

A Chinese hotpot chain with 22 North American locations is suing a consulting company after it was fined $250,000 and raided by the Canada Revenue Agency (CRA).

Liuyishou International Management Company (Canada) Ltd., the company behind Liuyishou Hot Pot, is seeking compensation from Vancouver-based Pinmo Creative Technology Ltd. and an individual named Scott Meng.

According to a civil lawsuit filed in B.C. Supreme Court on April 26, Liuyishou hired Pinmo in 2020 to help it apply for the Scientific Research and Experimental Development tax credit (SR&ED tax credit) for the 2019 fiscal year.

Liuyishou claims Meng either acted as Pinmo's directing mind or Pinmo was Meng's alter ego.

Liuyishou was founded in Chongqing, China, in 2000 and opened its first North American location in Richmond almost a decade ago. It now has 10 locations in Canada, including Richmond, downtown Vancouver and Burnaby.

While the statement of claim states that "Liuyishou operates ten Chinese 'hotpot' restaurants across Canada," the company clarified in a statement to the Richmond News that the Richmond restaurant "is a separate legal entity from the plaintiff" and "engages in a completely different line of business." They further state that the "restaurant and the plaintiff bear no direct ownership relations."

The hotpot chain had developed a supply chain and procurement system between 2018 and 2019 to "ensure its food remained as fresh as possible" and thought it might be eligible for the tax credit.

Liuyishou claimed it was introduced to Pinmo and Meng in 2019, who allegedly made "untrue" claims that Pinmo was experienced in preparing SR&ED tax credit applications, that Liuyishou would likely qualify and be approved for the tax credit and that Pinmo could prepare the application.

The lawsuit states Liuyishou provided documents and information to Pinmo and Meng that were "truthful, accurate, and were based on Liuyishou's actual business operations."

However, Liuyishou alleges the defendants "also created or obtained certain other documents or information to support the SR&ED Tax Credit application," and submitted them without Liuyishou's approval.

Tax credit application denied, penalized by CRA 

According to the lawsuit, the CRA denied Liuyishou's application in May 2022 and issued a penalty of about $250,000 for "gross negligence."

In a letter quoted in the lawsuit, the CRA raised concerns about the application including the fact that the application included "altered versions of published, publicly available research work as contemporaneous information" such as a 2017 Nigerian university research paper to support the application.

The description of work undertaken by Liuyishou "did not take place and (was) similar or identical to published research work available in the public domain," and the submissions of technical information "(did) not support" the claimed tax credit, according to the quoted concerns from the CRA.

"All of the CRA concerns which led to the penalty arose as a result of the work performed by Mr. Meng and/or Pinmo," reads Liuyishou's lawsuit.

The CRA subsequently raided Liuyishou's office on May 31, 2023 and the hotpot chain is currently under investigation.

According to the lawsuit, Liuyishou is currently awaiting the outcome of its notice of objection to the CRA from 2023, which was filed following the CRA's notice of reassessment which upheld the penalty.

Liuyishou claims Pinmo breached the contract by failing to perform its services professionally and submitting documents without its approval. It added Pinmo failed to indemnify or protect Liuyishou against costs arising from the services it provided, such as the penalty.

The hotpot chain further claimed Pinmo and Meng committed fraud and were negligent when performing their contractual duties.

It is seeking special damages, including the $250,000 CRA penalty and applicable interest if it does not get rescinded, as well as general damages and costs.

Pinmo and Meng have 21 days to respond to the civil claim. The Richmond News has reached out to Pinmo for comment but did not hear back by the publication deadline.

None of the claims have been proven in court.

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