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Huang v. Meng (2021)
Key Lessons / Points
- Information regarding your SR&ED applications may be disclosed in civil court; it is critical that your applications to the CRA are accurate.
- Individuals should not be paid solely to increase a SR&ED refund, particularly if they performed no work for the company.
- Please see the SR&ED Salary or Wages Policy for the most up-to-date information on SR&ED eligible salaries and wages.
Fiscal Years in Question
Court Heard In
The Supreme Court of British Columbia (Vancouver, British Columbia)
April 30, 2021
Length of Process
2021 BCSC 819
Amount Under Dispute
Decision The defendants have agreed to pay double costs from the date that the Offer was served, February 3, 2020. There will therefore will be an order to that effect awarding double costs against the defendants jointly and severally.  The application for special costs is dismissed.
Evilnut is a software and web design company based in Vancouver. In the initial case in which judgement was made on December 31, 2020, the Plaintiffs Wen Tao Huang (“Tony”), Yu Zhi Peng (“Daniel”) and Yu Cong Peng (“Lucas”) sought judgment against the Defendant, Fei Meng (“Scott Meng) of Evilnut, for a breach of agreements to purchase the Plaintiff’s shares in Evilnut, and also sought an order compelling Scott and the Company to take the necessary steps to transfer the shares in accordance with the share purchase agreements. The judge ruled against the Defendant and instead stated that the plaintiffs were entitled to their costs.
In this case, a one-day follow-up summary trial, the Plaintiffs submitted that there were grounds for costs to be assessed against the defendants at an elevated scale, as special costs, or alternatively as double costs from the date of the Plaintiffs’ formal offer to settle. The Defendant conceded that the Plaintiffs are entitled to the double costs order that they sought. However, they disputed that an award of special costs was appropriate. To determine if the Plaintiffs were entitled to special costs in this case the judge used the circumstances laid out in Mayer v. Osborne Contracting Ltd. (2011) as well as other cases involving the concept of special costs.
The Plaintiffs stated that Meng offered to pay them through the payroll of the company to boost their salaries paid and to increase their SR&ED claim. The evidence presented illustrated that the payments to Daniel and Lucas were not submitted as part of their SR&ED claim. The judge agreed that the Defendant lacked credibility and the affidavit evidence was incomplete and internally inconsistent. However, in the circumstances of this case, the defences put forward by the Plaintiffs’ was limited and did not support an award of special costs. The judge dismissed the application for special costs.
Key Excerpts In this one-day summary trial the plaintiffs sought judgment against the defendant Fei Meng (referred to as “Scott”) for breach of alleged agreements to purchase the plaintiffs’ shares in Evilnut Creative Technology Ltd. (“Evilnut” or the “Company”), a company of which Scott was the sole director and majority shareholder. They also sought an order compelling Scott and the Company to take the necessary steps to transfer the shares in accordance with the share purchase agreements.  As set out in the Reasons, the plaintiffs obtained judgment against the defendant Scott in the total amount of $235,265.41, and an order that Scott and the Company effect the transfer of the plaintiffs’ shares to Scott. The entire relief sought in the Notice of Civil Claim was granted.  As the successful parties, pursuant to Rule 14-1(9) of the Supreme Court Civil Rules, B.C. Reg. 168/2009, the plaintiffs are entitled to their costs of the proceeding against the defendants. The plaintiffs also submit that there are grounds in this case for costs to be assessed against the defendants at an elevated scale, as special costs, or alternatively as double costs from the date of the plaintiffs’ formal offer to settle.  The defendant Scott does not dispute the claim for double costs. As I understand Scott also to be speaking for the Company, the defendants acknowledge that a formal offer to settle this matter prior to trial (the “Offer”) was made by the plaintiffs on February 3, 2020, that the Offer was not accepted, and that the judgment exceeded the amount of the Offer. They concede that the plaintiffs are entitled to the double costs order that they seek. However, the defendants do dispute that an award of special costs is appropriate in this case.  The issue is therefore whether special costs ought to be awarded to the plaintiffs.  Pursuant to Rule 14-1(1)(b) of the Supreme Court Civil Rules, this Court may order the costs of a proceeding to be assessed as special costs. Special costs are warranted where a litigant has engaged in conduct that is reprehensible. The term “reprehensible” is a word of wide meaning that encompasses scandalous or outrageous conduct, but also “milder forms of misconduct” that are “deserving of reproof or rebuke”.: Garcia v. Crestbrook Forest Industries Ltd. (1994), 1994 CanLII 2570 (BC CA), 9 B.C.L.R. (3d) 242 (B.C.C.A.) at para. 17.  In this case, the plaintiffs say that there are two bases for awarding special costs against the defendants: first, that they pursued defences that were not pleaded nor supported by the evidence, and were wholly without merit; and second, that they tendered evidence that was intended to mislead the Court.  In Mayer v. Osborne Contracting Ltd., 2011 BCSC 914 at para. 11, Walker J. set out a number of circumstances where special costs may be warranted, including the following:
 Special costs are necessarily awarded on a case-by-case basis. Using the Garcia “reprehensible” standard and the other case law as guides, the defendants submit that the assertions made in the plaintiffs’ submissions do not trigger the “something more” element that gives rise to an award of special costs.  The plaintiffs submit that the defendants put forward a collection of meritless defences, new ones being advanced when a previous one was shown to be unsupportable, and without regard for compatibility, let alone internal consistency. In their Response to Civil Claim, the defendants pleaded: (1) there were no share purchase agreements; (2) the plaintiffs’ investments in the Company were, in fact, shareholder loans; and (3) Daniel and Lucas’s loan had been fully repaid.  The plaintiffs submit that this is not a case involving defendants who advanced honest defences and were merely unsuccessful at trial. To paraphrase Mayer, as quoted above at para. 10, they say that these defendants:
(a) where a party pursues a meritless claim and is reckless with regard to the truth;
(b) where a party makes improper allegations of fraud, conspiracy, fraudulent misrepresentation, or breach of fiduciary duty;
(c) where a party has displayed “reckless indifference” by not recognizing early on that its claim was manifestly deficient;
(d) where a party made the resolution of an issue far more difficult than it should have been;
(e) where a party who is in a financially superior position to the other brings proceedings, not with the reasonable expectation of a favourable outcome, but in the absence of merit in order to impose a financial burden on the opposing party;
(f) where a party presents a case so weak that it is bound to fail, and continues to pursue its meritless claim after it is drawn to its attention that the claim is without merit;
(g) where a party brings a proceeding for an improper motive;
(h) where a party maintains unfounded allegations of fraud or dishonesty; and
(i) where a party pursues claims frivolously or without foundation.
 In this respect I agree with the defendants. The defences did not succeed. The lack of credibility of Scott was dealt with in the various credibility findings addressing the relatively brief affidavit evidence which I observed was at best incomplete, and was found to be internally inconsistent. However, in the circumstances of this one-day summary trial, the persistence of the defendants in relying on those defences was limited, and does not support an award of special costs.  The plaintiffs say that Scott adduced evidence that was deliberately vague and failed to disclose material facts on matters of central importance to the determination of his obligations to the plaintiffs. Scott listed Company payroll figures, attached T4 statements issued by the Company, and deposed that these figures represented the total amount of payments to the plaintiffs between 2016 and 2019.  The plaintiffs’ written submissions at the summary trial characterized the defendants’ evidence as misleading for the following reasons:
(a) conducted this proceeding without regard to the truth or the manifest deficiencies in their case;
(b) persisted in their positions, and adopted new positions, when they knew or ought to have known that there was no viable defence to the action; and
(c) advanced positions at the summary trial which were without foundation and were bound to fail.
 This is not a case similar to Concord Pacific where in a lengthy trial there were many instances of misleading evidence. Here, following the filing of the materials referred to above, counsel at the one-day summary trial clarified the use that was to be put to the payroll amounts, and that the employment income of Tony had been included. It is therefore my view that this was not an attempt to mislead the Court such that special costs would follow.  As a result of the findings on the two issues raised on this application for special costs, the application is dismissed.
(a) Scott did not disclose that these amounts were gross payroll figures, but that the amounts to be credited toward the purchase price for the plaintiffs’ shares were agreed to be after-tax payments;
(b) Scott did not disclose that the total payroll figure for Tony of $85,721.50 included his actual employment income between January 2016 and November 2017; and
(c) Scott failed to provide any explanation for why the Company was paying Daniel and Lucas through payroll in 2016 and 2017 despite them not working for the Company. This was a matter which obviously warranted explanation. Scott’s evidence created the impression that the Company had been making distributions to Daniel and Lucas when in reality, the payments were part of a plan to enable the Company to increase its claim to SR&ED tax credits.
Link to Full Ruling
View the full report here.