Prime Minister Stephen Harper's cabinet has upheld a CRTC ruling that allows big telephone companies to compete against smaller ones in cottage country and rural areas.
But an industry group says many smaller phone companies may go out of business when the big players move in.
Smaller phone companies from Ontario and Quebec had petitioned cabinet to overturn a May 2011 decision by Canada's telecom regulator to allow competition in some rural and remote parts of the country.
Those areas had been protected from competition by regulations that allowed for only one incumbent service provider.
The CRTC had allowed the smaller companies to operate as monopolies in parts of the country the CRTC designated as high-cost areas — as long as they served everyone, and at a regulated rate.
Big phone companies also had to pay into an industry fund from which the smaller companies received subsidies. The CRTC ruling reduced the amount of those subsidies.
"There's going to be a double whammy on some of these companies," said Jonathan Holmes of the Ontario Telecommunications Association, one of the groups that appealed to cabinet.
"They're going to lose significant market share to the larger competitor, and they're going to lose industry subsidies that funds the obligation to serve.
"I think you're going to see some of these folks going out of business, and I think you're going to see, in some instances, some degradation of service out in the rural territories."
The industry groups had argued the CRTC ruling meant the big companies would be free to offer telephone services to homes passed by their cable networks while ignoring other potential customers in the more remote areas.
There are around 35 independent phone companies in Canada. One is based in British Columbia and the rest are in Ontario and Quebec.
Industry Minister Christian Paradis said Thursday the cabinet's decision will give rural customers more choice and access to phone services.
"Our government's policy has always been to encourage competition, foster reliance on market forces and ensure consumer choice," Paradis said in a statement.
"The CRTC's decision will give rural Canadians access to greater choice over local telephone service."
Meanwhile, the Federal Court of Appeal ruled this week the decision to uphold or overturn the CRTC's ruling falls to cabinet, and not the court.
The Ontario Telecommunications Association and L'Association des Compagnies de Telephone du Quebec had asked the court to stay the CRTC's decision.
But the court said it wasn't its place to do so.
"In these circumstances, this court would be meddling in a matter that is really for the Governor in Council to decide," Federal Appeal Court Judge David Stratas wrote in his July 3 ruling.
Holmes said the smaller phone companies have now exhausted every recourse.
"It's bad news for these folks."