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federal budget 2016

Canada's Finance Minister Bill Morneau is applauded as he delivers the federal budget in the House of Commons on Parliament Hill in Ottawa, Canada March 22, 2016.CHRIS WATTIE/Reuters

The Liberal government has frozen the small business tax rate, despite an election promise to reduce it over the next three years.

In the budget Tuesday, Finance Minister Bill Morneau indicated the tax rate on businesses earning less than $500,000 a year will remain at 10.5 per cent. That's still lower than the 15-per-cent general corporate rate but Ottawa will cancel a legislated reduction to 9 per cent, adopted by the former Conservative government.

"It's a big fat broken promise," said Dan Kelly, president of the Canadian Federation of Independent Businesses. "It's quite shocking this happened; I had no sense it was at risk."

Some 3.5 million businesses qualify as small corporations, including 2.4 million self-employed Canadians and professionals. The rate was scheduled to fall by a half-point reduction each year until 2019, with each half point costing Ottawa an estimated $300-million. As a result of the rate freeze, small businesses will pay $900-million more in taxes in 2019 than they would under the Conservative plan.

Prime Minister Justin Trudeau's first budget is a big spending effort, as his government argues the economy needs a multibillion-dollar infrastructure program and deficit-spending in order to boost a weakened economy.

The budget projects economic growth this year of just 1.4 per cent, compared to the 2-per-cent rate that was forecast in the November fiscal update. Finance Canada expects the budget measures to boost growth by 0.5 per cent this year and 1 per cent next year – much of that expected to come from a 10-year $60-billion boost to infrastructure spending.

It wasn't the only deviation from the Liberals' election platform. The budget also backs away from a pledge to curb the tax benefits of corporate stock options, saying they're overwhelmingly used by rich Canadians to lower their taxes. But the government faced intense lobbying from the venture capital, start-up and technology sectors, which argued that curtailing the benefit would hinder their ability to attract top talent.

Mr. Morneau told reporters in the budget lock-up that the government heard the concerns and has "no plan" to proceed with its stock option proposal.

Over all, the government expects to collect more than $11-billion over the next five years through various measures designed to tighten the corporate tax system, including tougher audits of companies by the Canada Revenue Agency and by closing a series of loopholes used by multinationals to shield income from taxation.

After years of favoured treatment by the Conservatives, the small business sector is bracing for more fallout from the Liberals, including higher payroll levies as Mr. Morneau promised to work with provinces to expand the Canada Pension Plan.

Mr. Kelly also criticized the $29.4-billion deficit – which is forecast to decline only gradually over the next four years. "We know today's deficits are tomorrow's tax increase," he said.

The government is also reviving a 15 per cent tax credit for investors in provincially-registered labour-sponsored venture capital funds – most notably, the Quebec Federation of Labour's $11.1-billion Solidarity Fund. The decision reverses the Conservatives' move in 2013 to phase out the tax break, and reinstates a federal tax credit worth up to $5,000 for individual investors, effective in the 2016 tax year.  Several provinces offer matching credits under the program, which will cost the federal government up to $160-million a year in lost tax revenue.

The federal Finance department acknowledged in 2013 that the credit is "an ineffective means of stimulating a healthy venture capital sector." It now says the measure provides "significant funding" to small- and mid-sized businesses.

As well, professional Canadians, such as accountants and lawyers, face tougher rules for accessing the small business deduction. Under current practices, professionals earning well above the $500,000 limit can form several corporations and partnerships, with each qualifying as a small business. Under new rules, those arrangements will be curtailed.

Editor's note: An earlier digital version of this story incorrectly stated the general corporate rate. This version has been corrected.

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