In an unexpected move, future tax cuts for small businesses have been cancelled.

The 2016 federal budget leaves the rate for Canadian-controlled private corporations at 10.5% for future years, instead of declining to 9% by 2019. The rate applies to a business’ first $500,000 of income. Above that, businesses pay the corporate tax rate of 15%.

“People are going to be disappointed that it’s not happening, but candidly I don’t think anybody’s too surprised,” says Nancy Graham, portfolio manager at PWL Capital. “All the messaging that’s been coming out [from the government] is about reversing some of the tax changes that were made by the previous administration.”

During the election, however, the Liberals had said they were in favour of continuing small business tax cuts, which were initiated by the Conservative government.

“We think small business is crucial to the economy, so we are happy to accept this reduction in the tax rate,” John McCallum, now Liberal Minister of Minister of Immigration, Refugees and Citizenship, told during the federal election last fall.

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The move is disappointing, but not disastrous, says Doug Carroll, vice-president of Tax and Estate Planning at Invesco.

“Given that it was only announced last year, I can’t see that there were likely any major initiatives that any business owner would have taken based on a 1.5% difference over the next three years,” he says.

Still, the cancellation of further tax cuts is a departure from what the tax community had been expecting in the budget. Experts had thought the government would change eligibility for the tax rate to deter wealthy clients from using CCPCs to avoid paying personal income tax.

Using a CCPC in this way “is very attractive for doctors and dentists who make a significant amount of money, to the extent they leave profits in their corporations,” James Kraft, vice-president and head of Business Advisory & Succession at BMO Wealth Management in Toronto told in the days before the budget. “If they had taken that same profit out and ran it through a personal tax cycle, they would have 47% [left] after 53% tax.”

Kraft notes many of these professionals keep as much as they can within the corporation and do their stock and bond investing there. “The investment earnings will be taxed at a higher rate, but they’re saving 85 cents on the dollar.” That gives them “a much larger pool [to invest].”

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Many believed Prime Minister Justin Trudeau was poised to end this practice by mimicking Quebec’s system. Kraft explained that qualifying for the lower tax rates in la belle province now requires clients to meet one of two criteria:

  1. they have more than three full-time employees throughout the year; or
  2. their business is in the primary sector or manufacturing sector. (Primary sector activities involve extraction of raw materials from nature and include “agriculture, forestry, [the] fishing and hunting sector and the mining, quarrying, and oil and gas extraction sector.”)

Kraft noted some estimates suggest the federal government stood to gain $500 million in tax revenue if it adopted the Quebec model nationwide.

In tandem with the stay on the tax rate, current dividend tax credit rates and gross-ups will continue to apply, the government says in the budget. The effective rate is currently 10.5%.