Canadian Prime Minister Mark Carney. On the left, flanked by Chief of the Defence Staff Gen. Carignan, and on the right – Minister of National Defence, David McGuinty. Photograph taken in Toronto on June 9, 2025. | Cole Burston/Getty Images
Abstract
Canada is undergoing a fundamental strategic shift in its defense posture, moving from decades of minimal investment toward active modernization and increased continental security engagement. This transformation is driven by escalating threats from Russia and China, particularly in the Arctic, alongside evolving NATO commitments and Indo-Pacific security concerns. However, this strategic reorientation faces significant challenges: a complex multi-departmental procurement system that generates delays and cost overruns, transparency gaps in military-industrial integration with the United States, and the impacts of recent amendments to the U.S. Buy American Act on non-defense sector access. Concurrently, the Department of National Defence and Canadian Armed Forces (DND/CAF) are addressing critical internal challenges around personnel shortages, institutional culture reform, and diversity objectives. This brief examines these interconnected policy domains and their implications for Canada’s defense modernization trajectory.
I. Strategic Defense Modernization and Investment
The Arctic as Strategic Priority
Canada now characterizes the Arctic as the “third front” of the contemporary security environment, necessitating substantial investment in continental defense architecture. The government has committed $38.6 billion over 20 years to modernize the North American Aerospace Defense Command (NORAD), specifically addressing threats from hypersonic missiles and advanced unmanned systems. Key initiatives include:
– Arctic Over-the-Horizon Radar (OTHR) system for enhanced situational awareness
– Polar OTHR system extending coverage across northern approaches
– “Crossbow” distributed sensor and communications infrastructure
These investments represent a generational transformation in Canada’s northern defense capabilities, though analysts emphasize the need for a coherent strategic narrative—potentially framed as a “Canadian Shield”—to effectively communicate these commitments to domestic and international audiences.
NATO and Expeditionary Commitments
Canada is substantially expanding its NATO presence in Latvia under Operation REASSURANCE, transitioning from a multinational Enhanced Forward Presence (EFP) Battle Group to a combat-capable Forward Land Forces Brigade. This expansion will increase persistently deployed personnel from 1,150 to nearly 2,000, demonstrating renewed commitment to collective defense in Eastern Europe.
In the Indo-Pacific, the DND/CAF maintains a persistent presence through Operation HORIZON and supports sanctions enforcement against North Korea through Operation NEON, aligning with Canada’s broader Indo-Pacific Strategy.
Budgetary Trajectory and Constraints
Canada has committed to reaching the NATO target of 2% of GDP for defense spending by 2030, up from approximately 1.3–1.4% in recent years. The 2025 defense budget reached CAD 49.1 billion. However, these increases occur alongside significant austerity measures: the DND/CAF is implementing over $810 million in spending reductions in FY 2024-25, potentially exceeding $900 million annually thereafter, through cuts to professional services, general operating funds, and specific initiatives. This creates tension between modernization imperatives and fiscal constraint.
II. Defense Procurement: Structural Complexity and Reform Prospects
The Multi-Departmental Model
Canada employs a uniquely decentralized procurement architecture involving multiple federal entities:
– Department of National Defence (DND): Defines operational requirements
– Public Services and Procurement Canada (PSPC): Manages contracting, bidding, and contract administration
– Innovation, Science and Economic Development Canada (ISED): Coordinates the Industrial and Technological Benefits (ITB) Policy, requiring contractors to reinvest 100% of contract value in the Canadian economy, prioritizing strategic technologies
– Treasury Board of Canada Secretariat: Provides oversight
Despite reforms introduced through the 2014 Defence Procurement Strategy, this system continues to face criticism for bureaucratic complexity, political interference, cost overruns, and delivery delays.
Proposed Centralization
Ministerial mandate letters from December 2019 directed analysis of options for creating Defence Procurement Canada, a centralized agency that would fundamentally restructure the current system in place for five decades. Such centralization could potentially streamline decision-making and accountability, though implementation details and timelines remain unclear.
III. Military-Industrial Integration and Transparency Concerns
U.S. Supply Chain Interdependence
Canadian defense firms are deeply integrated into U.S. supply chains, manufacturing critical components for major platforms including the F-35 fighter jet. Canadian military exports to the United States are estimated at a minimum of $1 billion annually.
Regulatory and Accountability Gaps
The Government of Canada generally does not regulate or publicly disclose the majority of military transfers—including parts and components—to the United States. This lack of transparency creates potential risks of Canadian complicity in human rights violations, particularly when U.S. security assistance flows to states with weak institutional constraints on extrajudicial violence.
Analysts have called for legislation analogous to the proposed U.S. “Berta Cáceres Human Rights in Honduras Act,” which would condition security assistance on demonstrable improvements in human rights conditions. Without enhanced oversight mechanisms, Canada’s military-industrial integration may inadvertently support policies inconsistent with stated Canadian values on human rights and international law.
IV. Buy American Act Amendments and Market Access Implications
Recent Regulatory Changes
The 2022 amendments to the Buy American Act (BAA) have tightened domestic content requirements for U.S. federal procurement. For products not predominantly composed of iron or steel, the threshold for qualifying as a “domestic end product” has increased from 55% to 60% (October 2022), will reach 65% (2024), and ultimately 75% (2029). The BAA also applies price preferences favoring domestic products: 50% for Department of Defense procurements and 20-30% for civilian agencies.
Defense Sector Exemptions
Crucially, the **Canada-U.S. Defence Production Sharing Agreement (DPSA)** provides significant protection for Canadian businesses in defense contracting. The increased domestic content thresholds do not apply to U.S. Department of Defense contracts with Canadian firms. Additionally, purchases covered by the World Trade Organization Agreement on Government Procurement (WTO GPA) are exempt from BAA requirements for Canadian businesses.
Non-Defense Sector Challenges
The primary impact falls on Canadian businesses bidding for U.S. federal contracts outside the defense sector. Mitigation strategies include:
– Engaging Canadian government officials to invoke applicable exemptions
– Operating as subcontractors to U.S. prime contractors
– Establishing joint ventures with U.S. partners
– Pursuing specific waivers (though the waiver process is described as “arduous and complex”)
V. Institutional Reconstitution and Cultural Transformation
Personnel and Recruitment Challenges
The DND/CAF faces significant personnel shortfalls, with Regular Force positions filled at 88.70% and Reserve Force at 75.18% as of FY 2022-23, both below the 95% target set for March 31, 2026. Reconstitution efforts focus on modernizing recruitment processes through digital transformation, streamlining training by recognizing civilian qualifications, and addressing chronic gaps across all service branches.
Culture Reform and Accountability
Culture evolution represents a foundational priority, implementing recommendations from the Independent External Comprehensive Review (Arbour Report) and related inquiries into institutional misconduct. The DND/CAF is implementing a Comprehensive Implementation Plan addressing 192 recommendations across four major reports, focusing on leadership development, expanded restorative services, and an Anti-Racism strategy.
Diversity and Indigenous Engagement
The department aims to reach 25.1% women in the CAF by March 31, 2026, and is integrating Gender-based Analysis Plus (GBA Plus) across operations, training, and procurement to ensure intersectional perspectives inform decision-making.
Indigenous relations receive particular emphasis, especially concerning northern operations and NORAD modernization. The DND has set a minimum 5% target for Indigenous participation in contracts by the end of FY 2024-25. Programs like the Canadian Rangers, which draw extensively on Indigenous knowledge and community presence, remain central to Arctic operations and reflect broader reconciliation commitments.
Policy Implications
Canada’s defense transformation unfolds across multiple dimensions simultaneously: strategic reorientation toward peer and near-peer threats, institutional modernization of procurement systems, navigation of complex bilateral trade regulations, and fundamental internal reforms addressing personnel and culture. Success will require:
1. Coherent strategic communication that articulates Canada’s defense investments within a clear national security framework
1. Procurement reform that balances efficiency with legitimate industrial policy and transparency objectives
1. Enhanced oversight mechanisms for military-industrial integration that align with Canadian human rights commitments
1. Sustained attention to institutional culture and personnel reconstitution as prerequisites for operational readiness
1. Careful management of bilateral defense-trade relationships that preserves Canadian sovereignty while maintaining critical continental defense cooperation
The coming years will test whether Canada can successfully manage these intersecting challenges while meeting both NATO commitments and evolving continental security requirements.
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For further information, contact the Tessera Research Collective at tessera.research@gmail.com
