A new Crown corporation for a changing defence sector: What Bill C-40 means for suppliers, SMEs, and investors

Key takeaways

• Your counterparty is changing.

  Many defence contracts that today are signed by or on behalf of the Defence Investment Agency (DIA) could move to a new Crown corporation that can contract, lend, guarantee, and invest, and existing DIA contracts would be read as contracts with that corporation.

• Competition becomes the default, subject to broad exceptions.

  For the first time, the Act itself would make competitive procurement a requirement for covered defence contracts, while letting the Minister dispense with competition if, in the Minister’s opinion, any of 13 listed exceptions applies.

• Procurement is becoming investment.

  Loans, advance payments, guarantees, credit insurance and equity-type investments could become part of how major defence programs are delivered.

• Supply chains will be scrutinized.

  Bidders may be excluded on security grounds without the Minister being required to provide reasons. The Minister would also be granted expanded powers to compel the disclosure of information, including contract costing details, with violations potentially attracting penalties of up to C$2 million per violation. Bidders, along with their subcontractors and distributors, should therefore be prepared to demonstrate regulatory compliance and transparency regarding ownership.

• Regulations will fill in the details.

  Key terms such as “urgent operational requirement,” “sensitive technology,” and “government entity” will be defined by regulation, and most provisions come into force by order in council, which leaves time for businesses to prepare and to participate in consultations.

On October 6, 2026, the Government of Canada introduced Bill C-40, An Act respecting production, procurement and investment in relation to national defence and national security (short title: the Strengthening Canada’s Defence Sector Act).^[1] The bill does two things. First, it would turn the Defence Investment Agency (DIA) into a stand-alone Crown corporation with its own powers to procure and invest. Second, it would substantially rewrite the Defence Production Act, which would be renamed the Defence and National Security Production and Procurement Act.^[2] Among other things, the rewrite would introduce, for the first time, a statutory competitive procurement rule with broad exceptions.

Early commentary has largely focused on the new Crown corporation itself. This article looks at what the bill would change for the businesses that contract with it: prime contractors, but also the small and medium-sized enterprises (SMEs), subcontractors, distributors, and investors who make up most of Canada’s defence supply chain. Below, we summarize the bill, identify the issues we expect to matter most in practice, and suggest steps businesses can take now.

Background: From special operating agency to Crown corporation

The DIA was created in October 2025 as a Special Operating Agency within Public Services and Procurement Canada (PSPC). Its mandate is to overhaul and streamline defence procurement and to build domestic manufacturing and supply chains by treating procurement as investment.^[3] The DIA is central to delivering Canada’s first Defence Industrial Strategy, launched on February 17, 2026, and its “build-partner-buy” framework. The government points to several recent procurements as early results, including the Canadian Modular Assault Rifle award to Colt Canada, the selection of Saab for Airborne Early Warning and Control, and the selection of TKMS as preferred supplier for the Canadian Patrol Submarine Project.^[4]

The government has said that a Crown corporation would provide “the next level of agility,” allowing the DIA to act more quickly, use commercial contracting practices more familiar to industry, and combine procurement and strategic investment under a single mandate.^[5] This marks a change of course from Bill C-31 (Budget 2025 Implementation Act, No. 2), which would have kept the DIA within the federal public administration; if C-31 receives royal assent, a coordinating amendment would repeal its division on the Defence Investment Agency Act and the Defence Production Act.^[6]

The change in status has practical consequences. A special operating agency is an operational unit of a department, not a separate legal entity. A parent Crown corporation is a corporate entity with its own board of directors that operates at arm’s length from government, which is not directly involved in its day-to-day management. Suppliers would therefore be contracting with a separate legal entity with its own decision-makers rather than with a government department.^[7] The features of that status, and the treatment of existing contracts, are discussed below.

Part 1: The Canadian Corporation for Defence Investment

Part 1 enacts the Canadian Corporation for Defence Investment Act. The Act establishes the Canadian Corporation for Defence Investment, which may also operate and identify itself as the Defence Investment Agency.^[8] Its key features are as follows:

• Mandate.

  The Corporation would carry out production, procurement and investment activities related to national defence for the benefit of the Canadian Forces or the Department of National Defence (DND). At the Minister’s request, it would also act for “associated governments” and advise ministers.^[9]

• Status.

  The Corporation would be an agent of His Majesty. However, the Governor in Council could declare that it is not an agent when carrying out specified activities. The Corporation could also contract with His Majesty as though it were not an agent. It would have the capacity of a natural person and would be listed in Part I of Schedule III to the Financial Administration Act. The Minister of Public Works and Government Services could still use the Act’s information-gathering powers, and its power to exclude bidders on security grounds, without giving reasons, in respect of the Corporation’s activities.^[10]

• Investment toolkit.

  The Corporation could exercise the stockpiling and acquisition powers in sections 15 and 16 of the renamed Defence Production Act. It could also make loans and advance payments and, with the approval of the Minister of Finance, provide guarantees, loan insurance or credit insurance, and acquire or dispose of shares and other financial instruments. Other financial arrangements would require Governor in Council authorization. The Corporation would be funded through its own C$1 billion envelope rather than the Minister’s Consolidated Revenue Fund authority under the renamed Act. When the Corporation exercises the stockpiling and acquisition powers, the bill applies the exceptions to competition in section 28 to the Corporation but does not list the duty to compete in section 27. Whether the Corporation is bound by the new competition requirement is therefore unclear and should be clarified at committee.^[11]

• Funding.

  Payments from the Consolidated Revenue Fund to the Corporation would be capped at C$1 billion at any time. The cap would be calculated net of certain repayments and proceeds, including amounts received from associated governments, and could be amended by an appropriation Act. The Minister of Finance could also make loans to the Corporation, and the Corporation could charge fees for its services. A transitional payment of up to C$30 million would be available within 180 days to cover start-up expenses.^[12]

• Governance and ministerial control.

  The board would consist of an Executive Chairperson, the CEO, the supporting Deputy Minister (ex officio), and up to two other directors, all appointed by the Governor in Council. The Minister could direct the Corporation to carry out, or not carry out, activities (after consulting the Minister of National Defence for DND-related work). The Minister could also require ministerial approval at specified points. Following a direction is deemed to be in the Corporation’s best interests.^[13]

• New minister.

  The National Defence Act would be amended to create an Associate Minister of National Defence for Procurement. The government states that this minister would be accountable to Parliament for the DIA.^[14] Under the new model, DND and the Canadian Armed Forces would continue to set capability requirements and acceptance criteria.

• Transition.

  The Agency’s rights, property, obligations and liabilities would transfer to the Corporation. References to PSPC or the Agency in existing contracts and instruments signed by or on behalf of the Agency would be read as references to the Corporation, unless the context requires otherwise. Agency employees would keep their status.^[15]

Part 2: A rewritten Defence Production Act

Part 2 renames the Defence Production Act and substantially broadens it. Responsibility for the Act would stay with the Minister of Public Works and Government Services, who is not to be confused with the new Associate Minister of National Defence for Procurement or the minister designated for the Corporation.^[16] The result is a partial transfer: the Corporation could exercise certain acquisition and stockpiling powers under the Act but would not take full control of the procurement regime. The key changes are:

• Broader scope.

  The Act would extend beyond defence to national security and would expressly cover services. A new definition of “defence services” excludes legal services. “Defence supplies” would include data and intangible property. “Defence projects” would include national security works and certain residential communities on DND-administered federal property. Works, things and services would not fall outside the Act merely because they also serve another purpose, so dual-use and commercial products may be captured. The definition of “associated government” would be expanded to include NATO partners in good standing and the European Union and its member states.^[17]

• Exclusive authority and delegation.

  Subject to the Corporation’s enabling Act, the Minister would hold exclusive authority to acquire defence and national security supplies and services for federal departments, subject to exceptions (including for Shared Services Canada). Most powers could be delegated to other ministers and deputy heads, but not the powers to provide financial assistance, to make payments out of the Consolidated Revenue Fund, or to decide which contracts are subject to the competition rules.^[18]

• Financial assistance and stockpiling.

  The Minister would gain powers to make loans, make advance payments, provide guarantees, and enter into other financial arrangements for defence and national security purposes. These powers would be subject to a C$1 billion cap. Subject to regulations, loan funding from the Consolidated Revenue Fund could not be used for capital equipment or works, or for defence research, development or innovation. Stockpiling could extend to national security, including economic security, to safeguarding against shortages, and to the needs of allies.^[19]

• Statutory competitive procurement rule.

  New sections 26 to 29 would require a competitive procurement process for covered defence contracts. However, the Minister could dispense with competition if, in the Minister’s opinion, any of 13 enumerated grounds applies. These grounds include urgent operational requirements; military operations, critical defence projects or national security; supporting a Canadian economic sector important to defence or security, including economic security; interoperability or interchangeability with Canadian or allied equipment; sensitive technology; single capable supplier; interim requirements and related contracts; R&D and innovation, including follow-on contracts for government-funded R&D; contracts with or through government entities or international organizations; existing Government Contracts Regulations exceptions; and any exception prescribed by regulation. The Minister would have exclusive authority to decide which contracts are covered, and the new rules would prevail over conflicting Financial Administration Act contracting regulations. The Act’s general offence provision expressly excludes the competition requirement.^[20]

• 

  Security-based exclusion.

  The Minister could exclude a person from a competitive process on reasonable grounds to believe that the person, a related person, or anything proposed for use in performing the contract poses a risk to national defence, national security, or public safety. No reasons would need to be given.^[21]

• Information, deemed terms and penalties.

  The Minister could, by written notice, require persons who produce, deal in or hold defence supplies, or who provide defence services, to provide information on those supplies or services, their sources of supply and their facilities. Regulations could deem terms into contracts, which would prevail over conflicting Financial Administration Act regulations, and could govern contract costing information. A new administrative monetary penalty regime, aimed at compliance with the costing-information and emergency-direction regulations, could impose penalties of up to C$2 million per violation, and summary conviction fines could reach $25,000. Business information obtained under the Act could not be disclosed without consent, subject to limited exceptions, and this protection would be added to Schedule II of the Access to Information Act.^[22]

Part 3: Review and coming into force

The ministers must review the new Act and the amendments within five years and table a report in Parliament. The clause enacting the Corporation Act and the Bill C-31 coordinating amendment would take effect on royal assent; all other provisions, including those of the Corporation Act itself, would come into force on dates fixed by order in council.^[23] As of this writing, the bill has received first reading and is at second reading in the House of Commons.^[24]

Implications for industry

Beyond the structural and legislative changes, Bill C-40 raises several practical considerations for organizations operating across Canada's defence sector.

• A new counterparty.

  Suppliers may increasingly contract with a Crown corporation rather than with the Crown through PSPC. Bidders should watch for new standard terms, commercial-style contracting, and how agent-of-the-Crown status (and any carve-outs) affects remedies, immunities and liability allocation. For existing contracts, the transition rules described above make a contract review the first practical step (see “What to do now” below).^[25]

• More non-competitive awards, and limited recourse.

  The enumerated exceptions, especially those for supporting Canadian economic sectors, sensitive technology and R&D follow-on contracts, give the government wide discretion to direct-award contracts. This may favour domestic champions and firms with government-funded R&D. Suppliers who do not receive these awards may have fewer opportunities to compete. Because the exceptions turn on the Minister’s opinion and non-compliance is not an offence under the Act, unsuccessful suppliers should expect challenges to be difficult. Firms should consider how these exceptions interact with trade agreement national security exceptions and with existing bid-challenge avenues, and should position early for sole-source eligibility where they can.

• Procurement as investment.

  Loans, guarantees, credit insurance and equity-type investments from the Corporation could become part of major programs. For companies, investors and lenders, this raises structuring questions, including government equity and governance rights, intercreditor arrangements, and conditions tied to Canadian content and Industrial and Technological Benefits.

• Supply-chain and ownership scrutiny.

  The no-reasons security exclusion, together with expanded information-gathering powers and penalties of up to C$2 million, puts a premium on supply-chain transparency, ownership and foreign-influence diligence, and compliance programs. These considerations are relevant to M&A, financings and foreign investment in the sector.

• Impact on SMEs, subcontractors and distributors.

  The bill updates the definition of “defence subcontract” so that it also covers services. Together with the dual-use rule, the information-gathering power and the ability to deem terms into contracts and related documents, this suggests that obligations will flow down the supply chain.^[26] Smaller suppliers should expect new flow-down clauses, costing and information requests, and security and ownership questions from primes, and should plan for the compliance resources needed to respond.

• Allied and cross-border opportunities.

  The expanded definition of associated governments, including the EU and its member states, along with the Corporation’s ability to act for them, may support joint procurement and exports. The bill also confirms that the Canadian Commercial Corporation may act on the Minister’s behalf or as the Crown’s agent under the Act, which is relevant to exporters and government-to-government transactions.^[27] This is consistent with Canada’s participation in the EU SAFE initiative.^[28]

• Accountability questions.

  Critics have warned that the arm’s-length structure could blur accountability.^[29] Parliamentary study may lead to amendments, so stakeholders should track the bill and consider participating in committee consultations.

What to do now

Companies active in, or seeking to enter, Canada’s defence and security market should consider the following steps now:

• Map your contracts.

  Identify current and planned contracts with the DIA, and review assignment, notice, and change-of-control provisions in light of the transfer to the Corporation.

• Get your supply chain in order.

  Review ownership, foreign-influence and supply-chain exposure against the security exclusion power, and confirm you can respond to information and costing requests.

• Assess your eligibility.

  Consider whether your products, technology or R&D history could support a direct award, and whether loans, guarantees or investment from the Corporation could fit your capital plans.

• Engage on the regulations.

  Monitor, and consider commenting on, the regulations that will define “urgent operational requirement,” “sensitive technology,” and “government entity,” as well as the deemed contract terms and penalty regime.

Gowling WLG’s Aviation, Aerospace & Defence and Procurement teams advise suppliers of every size, from primes to SMEs and distributors, as well as investors and lenders across the sector. We will continue to monitor Bill C-40 as it moves through Parliament and the regulations that follow. If you would like to discuss how the new regime may affect your business, please contact any of the authors.

This article provides general information only and is not legal advice. It reflects Bill C-40 as introduced at first reading on October 6, 2026, and may change as the bill proceeds through Parliament.