The B.C. Court of Appeal has overturned a crucial decision establishing when a tax lawyer’s duty to a client is complete, and he or she can sell their advice to a competing client. The decision is expected to be appealed to the Supreme Court of Canada.

In its decision known as 3464920 Canada Inc. v. Strothers, released on Jan. 21, 2005, the appeal court decided that Vancouver tax lawyer, Robert Strother entered into a conflict of interest and breached his duty to his former client, a tax shelter promoter known as the Monarch Entertainment Corporation.

Strother advised Monarch that Ottawa had essentially closed down the film tax shelter business following the release of new tax rules in 1996. But in early 1998 proceeded to prepare a tax ruling request for a former Monarch employee based on a loophole found in the new rules.

Following Strother’s advice on the state of film tax shelters, Monarch discontinued to seek counsel from him. Monarch’s written retainer with the law firm in which Strother was a partner, Davis & Company, was complete at the end of 1997, however, its relationship with the law firm to wrap up outstanding corporate business until August 1998.

Meanwhile, in early 1998, Strother was approached by the former Monarch employee, Paul Darc, who presented “a way around” the new rules. Strother agreed in March that he would prepare tax ruling request for Darc, in return for a share in profits from any “transaction,” and 50% of “equity” and voting rights. Strother did not tell his firm or Monarch about this. Eventually another Sentinel Hill Entertainment Corporation, and a slew of related companies were created.

The appeal court ruled that Strother’s actions created a conflict of interest between the two clients, and a conflict of duty due to his own interest in Sentinel’s success. He held back on advice that he should have given Monarch, says the court.

Monarch sued Strother, the law firm and Darc. It sued Strothers and Davis for breach of fiduciary duty. It also sued Darc for breach of confidentiality on the theory his “new structure” was appropriated from Monarch.

The appeal was dismissed against Darc, because his idea was ruled to be original by the appeal court. Meanwhile, Strothers and all the companies and trusts controlled by him have been ordered to account for all their profits.

The appeal court has requested further argument on any liability on the part of the law firm.