Prime Minister Mark Carney was a bit chuffed when Canada hit the North Atlantic Treaty Organization’s defence spending benchmark of two per cent of gross domestic product (GDP) in March, crossing the threshold for the first time in decades

after a fast-tracked spending surge . “This is the first time since the fall of the Berlin Wall that Canada will be spending two per cent of GDP on defence,” he said at the time. “Canadians are responding to our renewed commitment and the call to serve.”

The federal government added $9.3 billion to its defence budget last June, pushing total expenditures for the year past $61 billion, but hitting the NATO milestone also relied in part on how the money was counted.

Ottawa folded agencies such as the Canadian Coast Guard into the defence department’s books while also boosting military pay and stepping up investment in base upgrades and infrastructure.

Achieving NATO’s new target of spending five per cent of GDP on defence by 2035 is a more daunting challenge that could require Canada’s annual defence expenditures to more than double to

$150 billion . The government’s Defence Industrial Strategy , released in February, sets a parallel goal: directing 70 per cent of that spending

to Canadian companies , guided by a Build-Partner-Buy framework that favours domestic suppliers before looking abroad.

Reaching that lofty aim of building a truly sovereign defence sector at scale will require Ottawa to overcome a litany of challenges, some close to the defence industry say, including

cumbersome existing procurement policies , continued reliance on suppliers in the United States and other allies for high-end equipment and ambiguity over what counts as a Canadian company.

The hurdles are already evident in Canada’s industrial base. Canadian companies can build warships, satellites, armoured vehicles and advanced sensor systems, but they have not produced fighter jets, main battle tanks or howitzers for decades.

David Perry, president of the Canadian Global Affairs Institute think tank, said the strategy

represents a clear break from past policy , but the impact will depend on how it is implemented. “Previously, if you were registered in Berlin or Barrie, Ontario, you were basically treated the same. There was no preference being indicated for the firm being Canadian in terms of the selection,” he said. “One way to read the industrial strategy is that our default setting is going to switch from fair, open and transparent competition to fair, open and transparent competition, but

buying Canadian as a first choice.” That shift, Perry said, could be significant, but it will not eliminate the need to buy from abroad.

“There is always going to be an element of purchases that go offshore,” he said. “Today, we don’t have the capacity to produce everything the military needs and the military is in need of urgent replacement in a number of areas and we can’t wait multiple years to develop the Canadian capacity.”

For example, Canada is in the midst of a major rearming cycle that still depends heavily on equipment, including long-range rocket systems for the army, surveillance aircraft and drones, from companies in the United States.

One of the clearest examples of that reliance is Canada’s ongoing acquisition of F-35 fighter jets, a roughly $27 billion deal signed with U.S. defence contractor Lockheed Martin Corp. to acquire 88 advanced stealth fighters to replace its aging CF-188 Hornet fleet.

As part of the program, Canadian companies can compete for contracts within the global F-35 supply chain, but the aircraft are built and controlled through a U.S.-led consortium, thereby underscoring the limits of domestic production in certain high-end sectors. There has also been discussion about cancelling the deal, an idea Perry advises against.

“Our current Hornet fleet should have been replaced 15 years ago,” he said.

The strategy identifies 10 key sovereign capabilities — ranging from space-based surveillance and artificial intelligence (AI) to ammunition and underwater robotics — where the government will prioritize domestic ownership. By focusing on these specific niches, Ottawa said it hopes to build “domestic champions” that can serve the Canadian Armed Forces first before competing for a larger slice of the global market.

That represents both an opportunity for companies already in the sector and a test of whether Canada can overcome long-standing hurdles such as cutting red tape, building key capabilities at home and clarifying who counts as a domestic supplier.

It also aims to fix the procurement system, long criticized by many industry players for having slow timelines and uncertainty. The plan promises to centralize decision-making and speed up approvals through the recently created

Defence Investment Agency (DIA). “The intentions are good,” Greg Reid, president and chief executive of St. John’s, N.L.-based Kraken Robotics Inc., said. “But it will now come down to how quickly they execute … and how effective they are executing.”

Kraken develops subsea technologies used in underwater drones, including sonar systems that map the seafloor and batteries that power uncrewed vehicles through long missions. The company exports to more than 30 countries, with international sales accounting for roughly 90 per cent of its business, something Reid said reflects how difficult it can be to secure domestic contracts.

He said working with the government can be challenging and that the current approach has not kept pace with the needs of modern defence companies. He pointed to multiple funding streams and requirements that are not always aligned and create delays and inefficiencies.

Reid’s solution is a closer partnership between government and key businesses and he wants the government to make good on its promise to identify some domestic champions and “work together on contracts with a long runway.”

Kraken secured a roughly $40-million deal with the Royal Canadian Navy in 2022 to supply and integrate small underwater drones. The company is responsible for delivering the equipment and for maintaining it over its lifecycle, with delivery expected later this year.

But Reid believes Canada’s approach to acquiring such technology lags behind its allies.

He said Canada is deploying smaller, more specialized underwater drones weighing about 68 kilograms, but countries such as Australia, the U.S. and the United Kingdom are investing in much larger uncrewed underwater vehicles — essentially submarines.

Still, Kraken continues to grow. Earlier this month, it announced a $615-million acquisition of Covelya Group Ltd., which will expand its production capacity to 450,000 square feet across 12 facilities worldwide and position it as a more comprehensive “one-stop shop” for underwater robotics.

Reid said the company’s growth is closely tied to both international and domestic business.

“Getting more business on the home front only helps you as you tell your story,” he said. “(It) creates jobs in local communities and allows us to hire lots of interns and university students. It’s all circular; it’s all tied into the economy.”

Reid also said there is a broader issue in defining Canada’s industrial base.

“There’s a lot of defence companies that are foreign-owned Canadian subsidiaries,” he said. “If we’re talking about building Canadian industrial champions, we should also consider key industrial and sovereign capabilities and emerging companies that could grow into them.”

The government is already attempting to prove it can move faster. The DIA in February announced a $307-million contract with Colt Canada to replace the military’s 35-year-old C7/C8 rifles. On the surface, it’s a win: 30,000 rifles made in Kitchener, Ont., with an 80 per cent Canadian content requirement.

But Perry said the definition of Canadian remains a sticking point. Colt Canada is owned by the Czechia-based Colt CZ Group SE.

“If you do business here, pay taxes here and your employees are Canadian, that should count,” he said. “But one of the issues they need to clarify is a consistent definition across different government programs.”

Perry said the question of what counts as Canadian goes beyond the factory floor and into the digital architecture of modern warfare. He said for high-tech systems such as advanced sensors and underwater robotic platforms, sovereignty is ultimately about who controls the software and data.

“Modern fighter jets, surveillance aircraft and drones are, in large part, intelligence platforms. It’s not just about the mechanical parts,” he said. “To do the full connectivity on things that have to connect into an intelligence platform, you need to have both standard setting and, at the end of the day, certification by national governments.”

This creates a hurdle for the Build-Partner-Buy framework. Even if a Canadian company builds a world-class drone, dependence on a foreign ally for NATO satellite access limits Canada’s operational independence. True sovereignty, Perry said, requires Canadian hardware and high-level agreements that let Canadian software function at the alliance’s highest level.

Jim Girard, chief executive of OSI Maritime Systems in Vancouver, said there are reoccurring obstacles companies have to overcome. His company provides navigation systems used across the Royal Canadian Navy’s fleet, integrating radar, GPS and tactical data into a single real-time display.

But for each new project, OSI must re-enter a competitive procurement process that can stretch up to five years, even for systems already in service.

“We’re the only Canadian company that provides our technology,” Girard said. “So why bother? It’s a waste of everybody’s time.”

A real test of the strategy is playing out in the $60‑billion Canadian Patrol Submarine Project (CPSP). The government has shortlisted ready-made submarine designs from two foreign companies — Germany’s TKMS AG & Co. KGaA and South Korea’s Hanwha Corp. — in an effort to speed up delivery.

But the push for speed of delivery also comes with trade-offs. Girard said he’s concerned the project might skip the build and partner steps altogether. By potentially selecting a foreign navigation system, he said, the government would go straight to a buy option, sacrificing the sovereign control that the build step is meant to secure.

Girard said he met with Defence Minister David McGuinty a day after the DIS was announced at Seaspan ULC’s shipyard in Vancouver and wanted assurance that whatever submarine contractor is chosen will be outfitted with OSI’s technology and that the government would streamline and simplify the procurement process.

He said McGuinty promised to bring the same urgency to improving procurement as he did in securing last summer’s military pay raise.

“He said, ‘I can’t commit to 107 days,’” Girard said, referring to how the minister said he compressed the process that was expected to take up to two years into just over three months. “But I am committed to getting this done quickly.  My biggest fear is that defence procurement, even though it’s moving into its own procurement pillar, is going to look a lot like the old procurement.”

Those experiences reflect broader structural challenges in Canada’s procurement system that the new strategy is intended to address.

Federal rules have for decades emphasized open, competitive bidding, with limited ability to favour domestic suppliers, said Perry. Programs such as the Industrial and Technological Benefits policy encouraged foreign contractors to invest in Canada, but incentives were often inconsistent and not always tied to building the equipment Canada was buying.

The new strategy, he said, signals a shift away from that model.

“The Government of Canada is articulating a policy choice and direction that it will buy Canadian when it can,” he said.

Even so, turning that policy into results will depend on how quickly procurement processes can adapt and whether companies believe the system will deliver, said Perry.

One of the biggest barriers, he said, is the gap between identifying a capability and awarding a contract. Smaller companies in particular can struggle to bridge long timelines without predictable revenue.

“The problem is that the Government of Canada has not historically had the credibility that if it said it was going to make a purchase in 2026, it actually would make the purchase,” he said. “That whole skepticism based on past behaviour is one of the big things to overcome.”

That uncertainty can make it harder for companies to secure financing, scale production or invest in new technology, factors that will be critical if Canada hopes to grow its domestic defence base.

The government is trying to close that gap. A key part of the strategy is a $6-billion Defence Platform at the

Business Development Bank of Canada that is set up to provide loans when private banks are hesitant.

Perry said there is also a broader question about how clearly the government has outlined its spending plans.

“I don’t think we’ve yet seen in nearly enough detail a plan from the Government of Canada for what specific investments the Canadian military is planning to make,” he said.

Perry said the last publicly released list of investments and projects came in 2024, with the release of the Our North, Strong and Free policy.

“Since then, a ton of things have changed and the government’s made an awful lot more money available to national defence, but they haven’t really provided an itemized detailed plan for where they intend to spend the money,” he said.

That lack of clarity, he said, makes it harder for companies to anticipate demand and position themselves for future contracts.

Looking toward 2030, Perry sees a transition period as the military “digests” its current wave of multibillion-dollar purchases from U.S. companies. Once major contracts for F-35s and surveillance aircraft wrap up, he said, the true test begins: can the “buy Canadian” default actually foster a new tier of domestic giants?

“We can do a lot more in this country than our past purchasing patterns have reflected,” he said. “There’s a lot more room to grow how much of our spending gets directed in the first instance to Canadian companies.”

Perry envisions a hybrid military-industrial base where Canada would focus on proven strengths while aiming for a 50  per cent increase in global exports in niche sectors such as air defence and underwater robotics. Heavy hardware like tanks and fighter jets may still come from allies, but the goal is a future where Canada controls the “sovereign” technology — the sensors, software and autonomous systems — that underpin modern warfare.

“If this industrial strategy is successful and Canada can grow more domestic capacity, that should reduce our need to go offshore,” he said. “But I don’t think it will ever completely eliminate the need to spend money in other jurisdictions to access the best technology available.”

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