The North is no longer a buffer: Budget 2026 and the end of borrowed security

Executive summary

The bottom line:

Canada has stopped treating geography as a defence strategy. In under nine months, Ottawa has paired a Defence Industrial Strategy, a bill to make the Defence Investment Agency a Crown corporation (Bill C-40), its first national security policy in more than 20 years and a budget that funds all three. Together they amount to a legislated and funded plan to build a sovereign defence industrial base, and Canadian firms of every size are expected to deliver it.

Why it matters now:

• The doctrine has changed.

  The National Security Strategy says that relying on geography, interconnectedness and a rules-based order instead of sovereign Canadian capacity "is no longer tenable."

• Procurement is becoming industrial policy.

  Bill C-40 would create a Crown corporation that can procure, lend, guarantee and invest. It would also add statutory grounds for non-competitive awards that favour Canadian economic sectors, sensitive technology and government-funded research and development (R&D).

• Drones are the test case.

  Budget 2026 proposes $2.3 billion over five years, starting in 2027-28, for the Defence Drone Initiative. The Initiative runs a marketplace that gives access to nearly 400 trusted Canadian suppliers, and its first contract was awarded in 50 days.

• Capital is arriving.

  Sources include the Business Development Bank of Canada’s (BDC’s) $6 billion Defence Platform, the Canadian Imperial Bank of Commerce’s (CIBC’s) $2 billion commitment and a planned Canadian-headquartered Defence, Security and Resilience Bank.

• Trust is a competitive advantage.

  Ownership, supply chains and intellectual property (IP) will be tested as closely as the product. Firms that can answer those questions cleanly will be first in line for sovereign work.

What to do:

Use the practical checklist at the end of this article to map eligibility, prepare for supply-chain scrutiny and position early.

Sources: Budget 2026, Chapter 5; Defence Industrial Strategy.

Geography will not save us

For most of its history, Canada has treated the North as a moat. Distance, ice and a powerful southern neighbour did much of the work that other middle powers had to do for themselves. Ottawa has now said, in writing, that this era is over.

In the Prime Minister’s message introducing The Plan for a Stronger Canada: National Security for Canadians, released on October 29, 2026, the government states that the "long-held belief that the combination of our geography, interconnectedness, and a rules-based international order could substitute for Canadian sovereign capacity to protect ourselves is no longer tenable."^[1] It is the first national security policy Canada has published in more than 20 years.^[2] One week later, Budget 2026 opened its defence chapter with the same conclusion: for generations, geography, institutions and alliances "helped keep many threats at a distance. No longer."^[3]

That is the provocation for Canadian industry. If geography no longer protects the North, then something else has to: Canadian capability, built, owned and sustained in Canada. The policy architecture is now in place. The question is who will build on it, and how fast.

Four signals, one strategy

Each announcement, on its own, is a policy document. Read together, they form something Canada has not had before: a coordinated, legislated and funded plan to build a sovereign defence industrial base. Each answers a different question for industry: what the government wants, how it will buy, why it matters, and what it will spend.

1. The strategy

The Defence Industrial Strategy, launched February 17, 2026, set the frame. Its stated purpose is to "use procurement to build and maintain sovereign capabilities," supported by a new Defence Investment Agency applying a "Build–Partner–Buy" framework.^[4] Its 2035 targets are an estimated 125,000 new jobs, a 50% increase in defence exports and a 70% increase in the share of defence acquisitions awarded to Canadian firms.^[5] Budget 2025 committed $6.6 billion over five years to it.^[6]

The strategy also recognized a structural fact that should shape every policy conversation: small- and medium-sized businesses account for 92% of Canada’s defence industrial base and 40% of its employment.^[7] A sovereign industry is, overwhelmingly, an SME industry.

2. The law

Strategies can be shelved. Statutes are harder to ignore. Bill C-40 would turn the Defence Investment Agency into a stand-alone Crown corporation, the Canadian Corporation for Defence Investment, with the capacity to procure and to invest: to make loans and advance payments and, with the approval of the Minister of Finance, to provide guarantees, loan or credit insurance and to acquire shares and other financial instruments.^[8] Payments to the Corporation from the Consolidated Revenue Fund would be capped at $1 billion at any time, net of certain repayments and proceeds.^[9]

The bill would also rewrite the Defence Production Act and introduce, for the first time, a statutory requirement to award covered defence contracts through a competitive process, while allowing the Minister to dispense with competition where, in the Minister’s opinion, one of 13 enumerated grounds applies. Those grounds include supporting a Canadian economic sector important to defence or security, sensitive technology, and follow-on contracts for government-funded R&D.^[10] In other words, the law would give the government express tools to prefer Canadian capability where it chooses to.

Budget 2026 describes the purpose plainly: a Crown corporation with "a clear mandate, a permanent and centralized structure, and dedicated ministerial leadership," so that defence procurement becomes "faster, less fragmented, and with greater continuity and predictability across acquisitions."^[11] As of this writing, Bill C-40 has received first reading only, and most of its provisions would come into force on dates fixed by order in council.^[12]

3. The doctrine

The National Security Strategy does something earlier defence policies did not: it treats defence production as a matter of national security in its own right. It lists defence among eight Strategic Capabilities, alongside emerging technologies, critical minerals, energy, transportation, pharmaceuticals and biotech, food security, and payments, settlement and investment.^[13] Its defence plan includes building "a robust domestic industrial base capable of equipping and sustaining the CAF (Canadian Armed Forces)" and focusing "defence procurement on maximizing strategic autonomy and resilience, working with the Defence Investment Agency to deliver the Defence Industrial Strategy."^[14]

Its approach to industrial capability is deliberately pragmatic: "Where we can, we build these strengths at home. Where capabilities are complementary, partnering with reliable allies will bring us strength; where capabilities overlap, partnering will bring us scale."^[15] It also states that "economic security is a primary factor in decisions on industrial support, innovation, and foreign investment."^[16] That sentence deserves the attention of every investor, lender and mergers and acquisitions (M&A) practitioner in the sector.

4. The money

Budget 2026 is where intent meets the fiscal framework. It reports that Canada reached the North Atlantic Treaty Organization’s (NATO’s) benchmark of 2% of gross domestic product (GDP) in 2025-26 and states that the government has a funded plan to reach 4% of GDP within this decade, toward the NATO Defence Investment Pledge of 5% by 2035.^[17] It projects that defence investments will total more than $700 billion on a cash basis over five years, starting in 2026-27.^[18]

For industry, the more telling measures are targeted ones. Budget 2026 proposes to direct up to $2.7 billion over five years, starting in 2026-27, from previously announced funding, toward Defence Industrial Strategy priorities. These include recapitalizing the Canadian Defence Industry Resilience Program to enable direct strategic investments in sovereign capabilities, extending BOREALIS, Defence Industry Assist and the Regional Defence Investment Initiative, securing critical inputs such as nitrocellulose and high-grade ballistic steel, and fully operationalizing the National Research Council’s drone innovation hubs.^[19]

The drone test

If there is a single program that will reveal whether this architecture works, it is the Defence Drone Initiative. Budget 2026 proposes $2.3 billion over five years, starting in 2027-28, on a cash basis, to the Department of National Defence (DND) to "accelerate the discovery, acquisition, and deployment of uncrewed and counter-uncrewed capabilities."^[20] The Budget notes that a portion of this funding would be sourced from funding already provisioned in the fiscal framework.^[21]

What distinguishes the Initiative is not only the funding but the delivery model. Launched on July 23, 2026, it is led collaboratively by DND and the Defence Investment Agency and is intended to establish a competitive supply arrangement connecting operational requirements with Canadian innovation.^[22] According to the Budget, it has established a marketplace "to create a faster pathway for promising Canadian technologies to move from concept to operational testing and, where they meet defence requirements, into production." It provides access to nearly 400 trusted Canadian suppliers, and the first contract was awarded in 50 days.^[23]

Fifty days matters. Budget 2026 itself acknowledges that Canada’s defence procurement system has been "too complicated, slow, and reliant on international suppliers."^[24] The marketplace is a deliberate break from that model. The firms that move first from prototype to production will help set the standard for Canada’s drone industry, and for the procurement practices that follow it.

What it means for you

SMEs and innovators

The opportunity is real, and it is structurally weighted toward smaller firms. The Drone Initiative engages "from start-ups to medium-sized enterprises and established defence manufacturers."^[25] Defence Industry Assist is already supporting 860 SMEs.^[26] The Regional Defence Investment Initiative is designed to help SMEs enter or grow within defence supply chains.^[27]

Participation also demands more than a good product. Bill C-40 would expand the Minister’s information-gathering and contracting powers, and its definition of "defence supplies" would include data and intangible property, with dual-use and commercial products not excluded merely because they also serve another purpose.^[28] Our October 27, 2026, article, “A new Crown corporation for a changing defence sector: What Bill C-40 means for suppliers, SMEs, and investors,” addresses these obligations in detail.^[29] The practical point is that SMEs that build compliance capacity now will be the easiest partners for primes to choose.

Primes

Primes are the bridge between government demand and SME innovation. Under Build–Partner–Buy, the Defence Industrial Strategy prioritizes domestic production where feasible and partnership where it is not.^[30] Budget 2026 points to examples: the commitment that every additional Armoured Combat Support Vehicle will be designed by Canadian engineers, built with Canadian materials and assembled in London, Ontario, and new artillery manufacturing capacity in Québec and Ontario.^[31] Primes that build credible Canadian supply chains, including SME partnerships, should be better positioned for the sovereign-capability and economic-sector grounds that Bill C-40 would create for non-competitive awards.

Investors and lenders

Capital is following policy. Budget 2026 highlights BDC’s $6 billion Defence Platform, CIBC’s September 2026 commitment of $2 billion to small- and medium-sized defence-related and dual-use businesses, and Scotiabank’s Canadian Defence Issuance Framework.^[32] In addition, Bank of Montreal (BMO) and Royal Bank of Canada (RBC) have recently announced initiatives relevant to the sector. BMO has named an Enterprise Chair for the Canadian defence sector and is a partner bank for the Defence, Security and Resilience Bank Development Group, as part of its commitment to mobilize up to $70 billion over 10 years for sectors critical to Canada’s economic security and resilience,^[33] while RBC has launched a $1.4 billion initiative, including the RBCx Growth Fund I, that targets aerospace and dual-use defence among its frontier technology priorities.^[34]

Canada and its partners also intend to sign the Articles of Agreement establishing the Defence, Security and Resilience Bank in Luxembourg on November 30, 2026, with headquarters in Canada and full operationalization targeted for 2027.^[35]

Add the investment toolkit Bill C-40 would give the new Crown corporation, and the result is a capital stack in which government may sit alongside private capital as lender, guarantor or shareholder. That raises structuring questions, including governance rights, intercreditor arrangements and Canadian-content conditions, that should be addressed at the term sheet, not at closing.

Exporters

Sovereignty is not autarky. The National Security Strategy commits Canada to partner with reliable allies where capabilities are complementary or overlapping.^[36] Bill C-40 would expand the definition of "associated government" to include NATO partners in good standing and the European Union (EU) and its member states.^[37] Budget 2026 adds Canada’s intended participation in the EU’s €90 billion Ukraine Support Loan, which it says would allow Canadian companies to compete for approximately €60 billion in Ukrainian defence procurement.^[38] For Canadian firms, the export opportunity is now part of the domestic strategy, not separate from it.

Protecting what we build

A sovereign industry that can be bought, copied or compromised is not sovereign. This is the side of the agenda that receives less attention, and it is where legal advice matters most.

The National Security Strategy commits to modernizing Canada’s economic security toolkit, including "stronger enforcement tools to protect Canadians from hostile foreign economic activity," and to strengthening intelligence information-sharing with the private sector and research institutions.^[39] Budget 2026 proposes $6 billion over 10 years, starting in 2027-28, on a cash basis, and $579.5 million ongoing, for the Canadian Security Intelligence Service (CSIS), in part to reduce reliance on foreign partners.^[40] Bill C-40 would permit exclusion of a bidder where there are 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, with no reasons required, and would protect business information obtained under the Act from disclosure without consent, subject to limited exceptions.^[41]

For Canadian innovators, protection is therefore a two-way obligation. Companies should protect their own IP and data through careful contracting with government and primes, including how background and foreground IP are treated in development and follow-on contracts. They must also be able to demonstrate that their ownership, financing and supply chains do not create the very vulnerabilities the new framework is designed to exclude. The firms that treat this as a competitive advantage, rather than a compliance burden, will be the ones trusted with sovereign work.

What will decide who wins

Four factors will separate the firms that lead this shift from those that watch it.

• Speed.

  Much of the architecture is still being built: Bill C-40 is at first reading, key terms such as "urgent operational requirement" and "sensitive technology" will be defined by regulation, and the Drone Initiative’s new funding begins in 2027-28.^[42] Firms that engage now, including in committee study and regulatory consultations, will shape the rules rather than react to them.

• Demand signal.

  Budget 2026 directs both new and previously provisioned funding to specific programs, including the Drone Initiative and Defence Industrial Strategy priorities.^[43] That shows where demand will land. The firms already positioned when production contracts follow will be the ones that win them.

• Trusted capital.

  With economic security now central to industrial and investment decisions, and new national security tools proposed for both financial institutions and bidders,^[44] a clean, Canadian-anchored cap table becomes a selling point for sovereign work.

• Scale.

  Repeat orders and patient capital, not one-off pilots, will build durable Canadian champions. The financing platforms now forming give firms a path to get there.

Practical checklist

Strong by design

Canada has spent decades relying on distance, alliances and good fortune to secure the North. The government has now said, in its budget, its legislation, its industrial strategy and its national security doctrine, that it will rely instead on Canadian capability. That is a historic shift, but statements of intent do not build drones, radars or munitions. Canadian companies do.

The firms that move early, understand the legal architecture, protect what they build and partner intelligently will help define what a sovereign Canadian defence industry looks like. The North is no longer a buffer. It is a test. Canadian industry should intend to pass it.

How we can help

Gowling WLG’s Aviation, Aerospace & Defence and Procurement teams advise primes, SMEs, innovators, investors and lenders across Canada’s defence and aerospace sector, including on:

• Procurement strategy:

  positioning for the Defence Drone Initiative, Build–Partner–Buy opportunities and Crown corporation contracting.

• IP and data rights:

  protecting background and foreground IP in development, supply and follow-on contracts.

• Financing and investment:

  structuring BDC, commercial bank and Crown corporation financing, and government equity participation.

• Ownership and security diligence:

  preparing for security exclusion, information requests and economic security review in M&A and financings.

• Allied and export programs:

  accessing allied procurement, including the EU Ukraine Support Loan opportunities.

Join the conversation:

Todd J. Burke, partner and head of our Aviation, Aerospace & Defence Sector Group, will moderate a panel on these themes at Building the Defence Economy, part of the Advantage Canada series sponsored by Gowling WLG, in Toronto on November 10, 2026.
 

This article provides general information only and is not legal advice. It reflects Budget 2026 as tabled on November 5, 2026, and Bill C-40 as introduced at first reading on October 6, 2026; Budget measures are proposals and Bill C-40 may change as it proceeds through Parliament.