Four procurement priorities shaping Canada’s defence landscape

This article appeared in our Defence Forecast 2025 guide, which highlights the hot topics impacting Canada's aerospace and defence industries. Read the Forecast here.

Canadian defence procurement entered 2025 amid heightened uncertainty and growing geopolitical pressure. From increased scrutiny on long-standing programs to changes in government spending commitments and regulatory reform, the landscape is shifting fast for the defence and aerospace industry.

Below, our Procurement team highlights four key areas we’ll be watching this year.

1. Increased scrutiny on the Industrial and Technological Benefits Policy

Since its inception over a decade ago, the Industrial and Technological Benefits (“ITB”) Policy and its application has been an area of concern for potential suppliers and subcontractors. The application of the Policy, its benefits and results have been hard to decipher and opaque, leading to more questions than answers for potential suppliers.

In 2024, these persistent questions were brought into sharp focus in two in-depth reviews:

1. The Report of the Standing Committee on National Defence in June, 2024, “A time for Change: Reforming Defence Procurement in Canada”
2. The Report of the Office of the Auditor General on Industrial and Technological Benefits published on December 4, 2024

The Standing Committee considered evidence from several witnesses about challenges in applying the ITB Policy. Witnesses highlighted a myriad of concerns about efficiency and timeliness when applying the ITB Policy to defence procurement and raised questions about whether the investment into the Canadian economy attributed to the ITB Policy is actually benefiting the defence sector.

Ultimately, the Standing Committee recommended that Canada conduct a formal review into the effectiveness of the ITB Program and the impact it has had on growing Canada’s defence industry.

Six months later, the Office of the Auditor General (“OAG”) published its report on the ITB program, following a performance audit covering April 2020 to June 2024. The OAG’s key facts and findings reveal further concerns about the ITB program:

• Innovation, Science and Economic Development (“ISED”) did not have clear rules and guidance for applying the ITB Policy.
• Multiple eligible procurements over $100M had no ITB obligations whatsoever, and two had commitments that were less than the required 100 per cent of contract value.
• Neither the specific benefits nor the full costs of the ITB Policy were known.

The OAG made several recommendations to ISED to:

• Update and clarify the ITB Policy and guidelines.
• Update its key performance measurement framework.
• Ensure that the key industrial capabilities are developed to measure their contributions to the ITB Policy’s results.
• Review its service standards and how it calculates performance against these standards.

The OAG also recommended that ISED work with Public Services and Procurement Canada (“PSPC”) and the Department of National Defence (“DND”) to improve data tracking and reporting, and ensure appropriate controls are in place for reporting.

Key takeaways

ISED has been told to make it clearer when the ITB Policy applies and do a better job of tracking its results and performance. In addition, the Standing Committee on Defence recommended a fulsome review of the entire ITB Policy.

The defence and aerospace industry will be watching closely to see if the ITB Policy will be undergoing any meaningful changes this year. It will be critical for potential suppliers and subcontractors to comply with any new ITB Policy requirements in future procurements and to understand updated measures of success.

2. A change in government, defence spending and the two per cent GDP target

In 2014, Canada and other NATO members pledged to spend two per cent of their gross domestic product (“GDP”) on defence spending by 2032.  In 2024, NATO published figures showing that Canada still has not hit the target, with defence spending the equivalent of only 1.37 per cent of GDP.

The Trudeau Liberal Government announced in July 2024, that Canada will reach its NATO commitment to spend two per cent of its GDP on defence by 2032.^[1] Amid growing pressure from President Donald Trump, Minister Blair announced in mid-January an accelerated timeline, which sets a goal of 2027 for the two per cent target, shaving five years off the earlier estimates.^[2] 

However, the Office of the Parliamentary Budget Officer (“PBO”) had already questioned the more conservative 2032 forecast. According to the PBO’s own forecast, Canada is on track to meet its guideline of 20 per cent of military expenditure for major equipment starting in 2025 to 2026. However, per the PBO, military expenditures will fall short of the two per cent target, rising to a peak of 1.49 per cent in 2025-2026 before falling and stabilizing at 1.42 per cent by 2029 to 2030. ^[3]

Questions persist about whether Canada can meet the 2 per cent target, and how it is going to get there.

Key takeaways

In 2025, we anticipate ongoing and intensified pressure on Canada to increase its defence spending.

In mid-December, the opposition Conservatives said that they would maintain defence budget increases planned under the current Liberal government if they take power, without making equivalent cuts under their proposed “dollar-for-dollar” spending cap.^[4] This spending is earmarked for improved surveillance and better radar stations, defence infrastructure, sustaining naval vessels and more.

Prime Minister Mark Carney^[5] stated while campaigning as a Liberal leadership candidate that Canada needs to accelerate its timeline to meet the two per cent GDP goal, making promises of a 2027 and 2030 timeline respectively.^[6] Even that acceleration may not be enough to satisfy President Trump, who recently pushed all NATO countries to increase military spending to five per cent of GDP.^[7]

With significant changes ahead for Canada’s Federal leadership in 2025, it appears clear that regardless of who is in charge, Canada’s defence spending will be an area of continued interest with ongoing pressure to increase that spend. Our Procurement team will continue to monitor these spending announcements, and help to ensure defence suppliers are well positioned to respond to procurement opportunities ahead.

3. Canada’s Arctic Policy

Canada has managed to maintain its Arctic and northern regions cooperatively with low tension for many years. However, in a rapidly destabilizing world, challenges and threats to Canada's Arctic sovereignty and security are evolving and increasing. Not only must Canada assert its sovereignty to protect against potential external threats, it must also strengthen its presence in the region to safeguard its current sovereignty.

In December 2024, Canada released its new Arctic Foreign Policy. While many objectives within the Policy are focused on diplomacy, a key pillar of the Policy is an increase in defence commitments, including contributing to NATO and NORAD’s awareness of the threat environment across the Arctic region.

The new Arctic Policy is intended to complement Canada’s defence policy (Our North, Strong and Free: A Renewed Vision for Canada’s Defence), which proposed significant investments in defence over the next five years.

Another key pillar of Canada’s new Article Policy is an increased role for Indigenous peoples. The Policy recognizes that in addition to maintaining key partnerships with regional allies, it is necessary to strengthen the role and relations with those living in the area.

Inuit Nunangat, the Inuit homeland in Canada, makes up 40 per cent of Canada’s land area and all of its Arctic coastline. Collaboration with the Indigenous communities of the North is critically important to maintaining the territory. Equally important will be navigating the intersection between the agreements and commitments made with Indigenous peoples and the need for rapid and significant defence procurement.

Key takeaways

With Canada’s relationship with the U.S. being tested as never before, and a seemingly legitimate interest in U.S. acquisition of another key Arctic territory in Greenland, Canada may need to reexamine what partnerships it can rely on and foster in the Arctic. The U.S. plans seem to include expanding hemispheric control. While to date the Arctic territory in Canada has not been a significant focal point of the U.S. interest in Canada, like Greenland, it plays an important strategic role.

In 2025, much also depends on the winds of political change in Canada. It remains unclear whether the new government will adopt the current government’s approach, or part of it, or whether a more aggressive policy (and defence spend) will be tabled once the new government is in power.

4. Expanding the “National Security Exception”

Canada’s trade agreements all contain a “National Security Exception” (“NSE”)—the ability for Canada to exclude a procurement from some or all of the applicable trade agreement obligations by demonstrating that compliance with the trade agreements could be expected to pose a risk to the essential security interests of Canada.

Until recently, invoking a NSE did not affect Canada’s obligations to comply with the Government Contracts Regulations, including the requirement to solicit bids and to thoroughly document a decision to sole source a contract. As of December 2024, a NSE can now be used to excuse a procurement from both applicable trade agreement obligations and obligations under the Government Contracts Regulations.

The changes to the Regulations also make it clear that contracts that are not subject to an applicable trade agreement may also have the NSE applied, allowing Canada to avoid its obligations under the Government Contract Regulations for those contracts. This widens the exemption to lower value contracts with estimated budgets below the trade agreement thresholds (between $40,000 and around $135,000).

The invocation of the NSE exception was flagged in-mid 2024 by the Standing Committee on National Defence. The Committee specifically recommended that Canada update the procurement process to ensure that this exception automatically triggers oversight by independent agencies.^[8] In response, Canada specifically pointed to the safeguards present in the Government Contract Regulations, and Canada’s obligation to solicit bids.^[9]

Following these changes to the Government Contract Regulations, that is no longer the case. After invoking the NSE under a trade agreement or determining that a non-trade agreement procurement is “indispensable to national security” the Government Contract Regulations will no longer apply to a procurement and there will be no obligation to solicit competitive bids.

Key takeaways

This regulatory change may offer increased opportunities for sole-sourced defence contracts. The change is aimed at increasing efficiency and most appear to agree that is a laudable goal. The trade-off may be less robust records being created and kept of decisions to sole source a contract where a NSE exception is invoked.

Our Procurement team will be watching for further announcements in 2025 that could offer additional shifts in the defence procurement landscape.