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UPDATE 4-Under pressure over tax reform, Canada cuts small business tax

(Recasts, adds details on Morneau blind trust)

TORONTO, Oct 16 (Reuters) - Canada will cut the small businesses tax rate, the federal government said on Monday, as it tried to combat the criticism it has faced over tax reforms proposed earlier this year that targeted wealthy individuals and family businesses.

Prime Minister Justin Trudeau and Finance Minister Bill Morneau appeared side-by-side in Toronto's suburbs to announce the tax cut, highlighting their desire to get past what has become a major stumbling block as the Liberal government heads into the second half of its mandate.

"Powerful interests have benefited a lot from the current system, and they will fight hard to maintain the status quo. We knew that going in. But nothing will stop us from building an economy that works for more Canadians," Trudeau said in a sometimes combative news conference.

Morneau, the former president of human resources management firm Morneau Shepell, also faced heat over his personal finances, with the Globe and Mail newspaper reporting that he had not put his personal holdings in a blind trust that would avoid conflicts of interest, as Trudeau did.

Answering reporters' questions, Morneau said he had followed the advice of the Ethics Commissioner and that he would put his holdings in a blind trust if it is recommended.

While Trudeau has enjoyed a rosy profile on the world stage since his election in 2015, his honeymoon at home has ended, curtailed by the bungled tax reform and the election of a younger, hipper opposition leader who could steal away votes.

Pollster Nik Nanos said support for the Liberals had dropped 5 percentage points in the last four weeks, but the party remained about 5 points ahead of the Conservative opposition. The next election is in October 2019.

"The prime minister intervening (in the tax issue) is probably part of an attempt to reverse the negative trajectory," said Nanos.

The government said the small business tax would be lowered to 10 percent effective Jan. 1, 2018, and to 9 percent in 2019.

Measures to limit access to the lifetime capital gains exemption that critics said hurt the ability of families to pass their business on to their children were abandoned.

Morneau's three-pronged tax reform proposed in July, which affected those who sprinkled income among family members or used passive investment income in order to be taxed at a lower rate, sparked outrage among doctors, farmers and family businesses, and backbench Liberals have criticized the handling of the reform. (Reporting by Denny Thomas and Andrea Hopkins; editing by Phil Berlowitz and Chizu Nomiyama)