Photo: iStock Photo: iStock

Owners of small and medium-sized businesses across Canada have reason to feel at ease with Justin Trudeau’s ‘sunny ways’ federal budget, the first by the new Liberal government in Ottawa.

But the warm glow has more to do with what the budget didn’t do than with any new measures it did. Most of the fears SMEs had before Finance Minister Bill Morneau rose in the house on Tuesday went unrealized. Many in the business community—not to mention their CPAs and tax lawyers—were concerned that the Liberals would make bottom line-damaging changes to capital gain exemption or inclusion rates, potentially raising the latter by as much as 50%. That didn’t happen.

In addition, the Liberals did a 180 on plans to place an annual cap of $100,000 on stock option gains qualifying for a 50% tax deduction. The business community had lobbied hard against the measure, particularly the technology sector, where stock options are often floated as an offer-sheet incentive to attract top talent.

MORE INCENTIVES: How to Develop a Productive Profit-Sharing Program »

Still, entrepreneurs have reason to worry the dark fiscal clouds amassing on the horizon could block out sunny ways budget due to the massive spending planned—that is unless Canada experiences near-unprecedented growth in the next half decade.

The trouble with this budget is that it was designed to spur the growth needed to dig the country out of the deep fiscal hole it will create, but was short on measures that typically incentivize entrepreneurs to make strategic business investments.

In a surprise move—and despite campaign promises to the contrary—the tax rate on businesses earning less than $500,000 will be frozen at 10.5%, and will not be reduced to 9% as previously planned. While that is still down a half-point from the 2015 corporate tax rate of 11%, it’s news that is sure to disappoint an entrepreneurial community hoping for a more significant tax break. Instead, business owners will be paying an estimated $900 million more in taxes by 2019, than they otherwise would if the Liberals had kept this key promise, according to the Canadian Federation of Independent Business.  

There were several other measures poised to irk business owners, from the elimination of ‘sidecar’ structures that allow corporate partnerships to multiply the small business deduction in certain circumstances, to the closing of tax-sheltering insurance loopholes.

MORE MEASURES: 9 Ways the 2016 Federal Budget Could Affect Your Business »

There was another fundamental concern that some have overlooked, but shouldn’t. Entrepreneurs have reason to be cautious about this budget because, even though it was supposed to be about infrastructure investments (indeed, the government did allocate $11.9 billion over five years to pay for everything from transit to waste water management improvements), for the most part it was about program spending. The latter, as we all know, becomes an ongoing cost to the treasury, which tends to grow over time. Perhaps this is why Morneau didn’t really have a plan or timeline to get back into black after posting a nearly $30 billion deficit. Unfortunately this is a budget reliant on economic growth that may not be realized as anticipated.

Sure, some SME owners will likely benefit from some of these infrastructure investments in the near term, but even if robust growth does return, it will come with higher interest rates, an increased federal debt load and steeper debt servicing costs. Somebody has to pay that bill, likely in the form of increased taxes. That ‘somebody’ could well be business owners.

In addition, the budget noted that the Liberals would spend the year reviewing the tax system for inefficiencies and poorly targeted tax measures. And that likely means that some of the aforementioned tax changes that business owners managed to dodge this time around could resurface down the road.

While the Liberals’ first budget has largely earned a passing grade from economists, business owners may want to grab an umbrella. Sunny forecasts eventually give way to storm clouds that could soak their balance sheets.  

Armando Iannuzzi is a tax partner at Kestenberg Rabinowicz Partners LLP, a Markham, Ont.-based firm that provides strategic tax, accounting and finance services to entrepreneurs.

MORE PERSPECTIVES ON THE 2016 FEDERAL BUDGET:

Which of the changes or decisions in the budget will most impact your business? What are you happy or angry about? Share your reactions to the 2016 federal budget by commenting below.

Loading comments, please wait.