Canada’s new Defence Industrial Strategy

By Erin Best & Robert Bradley

On February 17, 2026, the Government of Canada released its Defence Industrial Strategy (the “Strategy”). This follows a series of announcements highlighting the Government’s focus on rebuilding its military and pledging $81.8 billion in Budget 2025 to increase investment in defence.

The Strategy recognizes that national security and economic security go hand in hand. The Government has signalled that defence spending must benefit the Canadian economy. The Strategy aims to maximize growth, job creation, and economic benefits in many sectors of the Canadian economy.

Much of Canada’s defence industry is currently made up of small and mid-sized businesses (“SMBs”) which constitute 92 percent of all firms and 40 percent of sector employment. The Government is focused on providing opportunities to help SMBs grow and scale up to become critical anchor firms, including funding a new $4 billion Defence Platform at the Business Development Bank of Canada (the “BDC”).

Canadian innovators, especially those offering dual-purpose technologies (technologies with applications in both civilian and defence industries) are poised to capitalize on the Government’s promise to help grow Canada’s defence exports, especially to Europe and the UK. This will require innovators to pay special attention to the treatment of intellectual property in bids and contracts.

The Government will implement a “Build-Partner-Buy” framework to ensure that Canadian industry plays a central role in rebuilding the Canadian military. The name reflects the Government’s cascading priorities:

1. Build: The framework focuses first on building in Canada. The Government will typically direct new defence procurements to Canadian firms in relation to home-grown strengths and key sovereign capabilities as a matter of policy. “Buy Canadian” will be the guiding North Star in defence acquisitions.
2. Partner: If it is unfeasible to build domestically or where there is advantage to working jointly with partners, the Government will pursue partnerships with trusted allies.
3. Buy: Finally, where it is not feasible to build domestically or partner with an ally, Canada will buy from allies but will impose strong conditions to spur reinvestment into the Canadian defence industrial base.

The Strategy reflects the importance of protecting Canada’s North. As a changing climate opens new sea routes, new opportunities for resource exploration and shipping are emerging. These opportunities are married with new threats. The Strategy expressly confirms the Government’s commitment to northern defence and surveillance.

The role of the Defence Investment Agency

The Government has confirmed its intention to establish the Defence Investment Agency (the “DIA”) as a stand-alone entity that will support the mandate of the Strategy and streamline delivery of critical equipment to the Canadian Armed Forces and Canadian Coast Guard.

The DIA will lead the establishment of a Defence Advisory Forum to engage with the defence industry.

The Strategy identifies ten Key Sovereign Capabilities (“KSCs”) which the DIA will prioritize for build in Canada:

1. Aerospace: Aerospace Platforms; Avionics; and Aircraft Communications
2. Ammunition: Common Ammunition; Battle-Decisive Munitions; Small Arms; Missiles and Bombs
3. Digital Systems: Secure Cloud; Artificial Intelligence; Quantum Computing and Communications; Integrated Command, Control and Communications; High- Assurance Communications Equipment
4. In-Service Support: Naval; Land; Air
5. Personnel Protection: Medical Counter Measures
6. Sensors: Marine Sensors; Quantum Sensors; Electronic Warfare
7. Space: Space-Based Intelligence, Surveillance and Reconnaissance; Space Domain Awareness; Satellite Communications; Space Launch
8. Specialized Manufacturing: Land Vehicles / Surface Ships, including Icebreakers and Marine Systems
9. Training and Simulation: Naval; Land; Air
10. Uncrewed and Autonomous Systems: Uncrewed and Autonomous Land, Aerial, Underwater and Surface Systems (including Uncrewed Collaborative Platforms)

The KSCs will not be static and will evolve with the threat landscape, capability needs, technological change, and domestic industrial capacity.

Modernizing the Industrial and Technological Benefits Policy

Since 2014, Canada’s defence and security procurement have been shaped by the Industrial and Technological Benefits Policy (the “ITB Policy”). At a basic level, the ITB Policy places legal obligations on companies that are awarded defence contracts to undertake economic activity in Canada equal to at least 100 percent of the value of the contract. These obligations are referred to as ITB offsets. The ITB Policy contains multipliers in relation to ITB offsets to incentivise the most desirable activities in Canada.

The Government has promised reforms to the ITB Policy in five areas to sharpen its contribution to the Canadian economy:

1. Alignment with key sovereign capabilities: the Strategy indicates that the Government will update the key industrial capabilities to align with the identified KSCs.
2. Strengthening Canadian Innovation and Industrial Capacity: the Government promises to introduce new mechanisms incentivising strategic investments, research and development, and IP development. The Strategy signals the creation of a Strategic Transaction Credit to promote investments that expand industrial output and sovereign capabilities as well as the introduction of a “Canadian Company Boost” to reward direct work with Canadian firms.
3. Supporting exports and deeper integration into allied supply chains: the Strategy acknowledges that by easing eligibility criteria under the ITB Policy, firms could claim exports and supply chain activities as ITB credits. The Government promises to pursue targeted flexibilities under the ITB Policy to enhance exports and supply chain activities.
4. Rewarding skills development: the Strategy acknowledges that re-examining incentives for skills development and the ITB multipliers for contributions to skills development and training could make the ITB Policy more effective in building needed defence-sector skills and capabilities.
5. Simplifying administration: the Government acknowledges that clearer and more predictable approval processes will reduce uncertainty. Changes to the definition and verification of SMBs under the ITB Policy could make their participation in defence procurement more feasible and could better support the growth and innovation of these businesses.

Participants in defence procurement should be keenly aware of the ITB Policy and any changes thereto as it will continue to play a considerable role in the Government’s procurement and contracting decisions.

The Strategy promises great opportunity for a broad array of Canadian businesses, including established players in the defence sector, innovators creating dual use technologies, and the many SMBs who will subcontract to the primes.

The success of the Strategy will depend on the ability of procurement officials to implement this new mandate which is meant to prioritize growth of Canadian businesses. Implementation is likely to take time. Until the DIA becomes fully operational, businesses will face challenges anticipating demand and navigating the procurement landscape which continues to include many different government departments.

The success of businesses aiming to play a role in Canada’s defence industrial base will depend on how quickly they can understand and leverage these major changes. 

Stewart McKelvey’s Defence and Government Procurement groups are available to assist clients with navigating this changing landscape, meeting the unique requirements associated with these emerging opportunities, protecting valuable IP to enable commercial scaling and export, and becoming critical members of Canada’s defence industrial base. 

Stewart McKelvey will continue to monitor the implementation of the Strategy and update clients as significant changes occur.

This client update is provided for general information only and does not constitute legal advice. If you have any questions about the above, please contact the authors, or a member of our Defence or Government Procurement groups.

Click here to subscribe to Stewart McKelvey Thought Leadership.