Canada Reawakens to Defence Imperative

Surging Interest Signals Generational Shift in National Security Priorities

A palpable sense of urgency gripped a recent gathering of investors, government officials, and entrepreneurs in Toronto. Nearly half the attendees raised their hands when asked if Canada would be at war within five years. Many still held their hands aloft when the timeframe shortened to two years, and some even when asked if conflict was already imminent. This stark question, posed by Kevin Reed, president of the European Defence, Security, and Resilience Bank, highlights a growing national awareness that Canada faces multi-front threats, extending beyond the kinetic to the digital realm.

The unexpectedly overwhelming attendance at a Toronto Tech Week session on defence work and investment underscores this newfound national focus. Initially anticipated to draw a dozen participants, the event saw over 100 sign-ups, with many more placed on a waiting list. This surge in interest reflects a fundamental shift in Canadian consciousness, where sovereignty and security have regained paramount importance amidst increasing pressure from allies, particularly the United States, for Canada to bolster its contributions to the Western alliance.

“This is a generational shift in Canadian defence policy.”

—Goran Pesic, President, Samuel Associates

For Canadian industry, this evolving landscape presents significant opportunities. Major corporations like CAE Inc. and Bombardier Inc. stand to gain substantial new business lines and lucrative government contracts. Emerging technology companies, once deterred from the sector, now find themselves in a rapidly expanding and highly sought-after market.

Decades of Neglect Give Way to Renewed Investment

Defence has languished as a national priority for decades. Canada, along with other North Atlantic Treaty Organization (NATO) members, committed in 2006 to spending 2 percent of its Gross Domestic Product (GDP) on defence, a target it has yet to meet. For the most recent fiscal year, defence spending stood at approximately $41 billion.

This status quo is poised for a dramatic overhaul. Prime Minister Mark Carney has committed to increasing defence-related spending to 5 percent of Canada’s GDP by 2035, a move that will necessitate an annual expenditure of up to $150 billion, more than doubling the current budget. This strategic pivot is partly driven by pressure from allies, including the United States, whose leadership has voiced concerns about the perceived over-reliance on American military might.

“We are a laggard, our allies will all tell you that, but we have the opportunity to be a leader.”

—Erin O’Toole, President and Managing Director, ADIT North America

This reorientation confronts a history of underinvestment. Past governments, both Liberal and Conservative, have curtailed defence programs, from the cancellation of the Avro Arrow in 1959 to the phasing out of Sea King helicopters in 1993 and the initial planned cancellation of the F-35 fighter jet purchase under Prime Minister Justin Trudeau in 2015. These decisions were often justified by taxpayer costs and shifting priorities, leading to a public perception that military spending exists in opposition to social programs.

The Present: Rekindling Domestic Capabilities

For generations, Canada’s defence posture has been heavily influenced by its southern neighbour. Reliance on the United States for political direction through alliances like NORAD and NATO, and for military technology, has shaped Canada’s approach. While domestic military capabilities have atrophied, significant areas of expertise persist, including icebreaker construction for Arctic security, earth-observation satellite systems, surveillance aircraft, military transport, and training simulations.

However, the Canadian defence industry remains deeply integrated with the U.S., with roughly 40 percent of its companies being subsidiaries of American firms. This close relationship, while beneficial, has also fostered a degree of strategic complacency. Analysts suggest this dependency necessitates a recalibration of security strategies and spending, particularly concerning Arctic sovereignty and the broader institutional relationship with U.S. military and industrial partners.

Canada’s military procurement system is widely acknowledged as inefficient. The responsibility for acquiring equipment is fragmented across multiple federal departments, including National Defence, the Canadian Coast Guard, Public Services and Procurement Canada, Innovation, Science and Economic Development Canada, and the Treasury Board of Canada Secretariat. This multi-agency approach has resulted in bureaucratic complexities, delays, and cost overruns, as detailed in a 2024 House of Commons report.

In response, Prime Minister Carney has appointed former CF-18 pilot Stephen Fuhr as Secretary of State for defence procurement and pledged to establish a dedicated defence-purchasing agency. The aim is to streamline the acquisition process and prioritize domestic suppliers.

Yet, challenges remain. John Molberg, vice-president of Canadian UAVs, noted the significant gap between government announcements and actual procurement, stating, “The number one challenge that we have as small defence companies is, from the time a government announces what they want to do, to when they buy it, you can go out of business.” He stressed the urgency of modernizing procurement to keep pace with rapidly evolving warfare technology.

Even Crown corporations like BDC are shifting their focus. BDC President and CEO Isabelle Hudon indicated plans to actively seek defence-related technology investments and recruit personnel with expertise in the sector. Canada’s major banks, traditionally hesitant to engage with defence, are now publishing analyses on the economic implications of increased military spending, recognizing its potential to stimulate manufacturing and offset U.S. tariffs. This renewed focus aligns with findings that Canada’s manufacturing output share has declined significantly since 1987, when defence spending was at 2 percent of GDP.

Recent analysis by National Bank of Canada economists **Ethan Currie** and **Stéfane Marion** highlights the broader economic implications: “This arms race is not only about hitting a spending target. It’s an opportunity for Canada to stage a comeback in productivity and industrial competitiveness.”

The Opportunity: Cultivating Defence Innovation

The renewed focus on defence spending presents a significant opportunity for Canadian industry. CAE Inc., a pioneer in pilot training, founded in 1947, is positioned as a major beneficiary. With a robust defence segment contributing 42 percent of its revenue and a backlog exceeding $11 billion, CAE is well-placed to capitalize on new procurement programs, particularly those involving training services.

France Hébert, who leads CAE’s Canadian defence business, described the government’s new direction as a “potential gamechanger,” marking a departure from viewing defence as an easily expendable budget item. Similarly, Mike Greenley, CEO of MDA Space, noted that increased defence spending is crucial for Canada’s international business standing and security. He anticipates an expansion of MDA’s pipeline as defence programs become more defined.

Calian Group Ltd. CEO Kevin Ford also sees burgeoning opportunities for his company, which derives nearly half its revenue from defence-related work. He expressed confidence that the federal government will partner with Calian on projects like NORAD modernization.

There is a growing consensus on the need to bolster Canada’s space-based capabilities for surveillance and communication. Mike Greenley suggested the development of “counterspace spacecraft” could enhance Canada’s ability to protect its assets and deter adversaries.

Luxury jet manufacturer Bombardier Inc. is also exploring its defence potential. The company, along with partner Saab, recently secured an order for its GlobalEye surveillance system from France, and Canada is seeking similar early warning aircraft. Bombardier CEO Éric Martel aims to grow the defence segment’s sales to $1.5 billion by 2030, seeing significant momentum and previously unforeseen opportunities. He advocates for long-term planning in developing domestic industrial capabilities, including aircraft design and development.

At Seaspan Shipyards, CEO John McCarthy is optimistic about the company’s prospects under the new defence spending direction. Seaspan has been building capacity under the National Shipbuilding Strategy, constructing icebreakers and support ships for the Canadian Coast Guard. The increased and consistent funding, McCarthy believes, is essential for driving down costs and retaining skilled labour.

The surge in defence spending also benefits small-to-medium-sized technology companies with dual-use products. Erin O’Toole highlighted opportunities in areas like Arctic infrastructure, where sensors and acoustic devices for tracking can also provide high-speed connectivity to remote communities. Mark Maybank, co-founder of Maverix Private Equity, noted that dual-use technology offers a pathway for investment funds restricted from purely defence-related ventures. Quantum computing and cybersecurity are identified as critical growth areas, with Canada having a second chance at commercialization and intellectual property retention in these fields.

The evolving nature of warfare, demonstrated by drone attacks in Ukraine, underscores the importance of technological advancement. John Risley, chairman of the Arctic Economic Development Corporation, stated, “The guy who’s got the best computing power, and best being defined as both the most and the most appropriate, is going to win control of the battlefield.”

Pathways and Pitfalls: Navigating the Future

Industry leaders are now awaiting concrete action from the government. Christyn Cianfarani, president of the Canadian Association of Defence and Security Industries (CADSI), called for a comprehensive Defence Industrial Strategy, detailing key capabilities, procurement targets, and timelines, alongside the structure of a new procurement department. While Ottawa has allocated $2.1 billion for such a strategy, its release timeline remains unspecified.

“This is a massive step change… To do it and actually get growth out of it, you need to change your mindset from just spending money to spending and investing for the long term… We’re in nation-building mode.”

—Christyn Cianfarani, President, CADSI

Challenges persist for Canadian industry, particularly regarding size and financial health. Mark Norman, a retired navy vice-admiral, suggested consolidating smaller firms into larger “Apex corporations” to better compete with foreign rivals.

Bell Helicopter Canada advocates for a more nationalistic approach to defence procurement, inspired by the United Kingdom’s model. Marc Bigaouette, who leads Bell’s Canadian government programs, explained that the UK considers the broader economic impact, including domestic employment and exports, when making purchasing decisions. He contrasts this with Canada’s historical view of defence as an expenditure rather than an investment.

Furthermore, recognizing the “dual-use” nature of many Canadian commercial technologies is crucial. Bell’s Griffon helicopters, for instance, are military offshoots of commercial products. Patriot Forge Co. CEO Robert Dimitrieff shared his experience of struggling to gain recognition from Canada’s defence department despite decades of supplying the U.S. military.

Flick at the Future: A Nation Reimagined

Canada’s current defence build-up is akin to a wartime effort, requiring significant internal savings from other federal departments and potentially deeper deficits. While public support for the 2 percent GDP defence spending target is robust, a recent Angus Reid Institute poll indicated that nearly half of Canadians view the 5 percent target as excessive.

The long-term impact of this increased spending on priorities such as housing, healthcare, and climate change will unfold over years. However, John Risley emphasizes the need for a cultural transformation within government, moving from risk aversion to proactive, long-term investment. Goran Pesic of Samuel Associates echoes this sentiment, stating that achieving the necessary military posture requires unprecedented efficiency and a willingness to take calculated risks from the civil service.

The ultimate success of this strategic shift hinges on Canada’s ability to foster domestic capabilities and maintain a long-term vision. As Robert Dimitrieff puts it, “The new defence spending is important, but what matters is what we as a nation build with it. If we do it right, this is our change to create a lasting capability that will strengthen our country, support our allies, and secure a free and prosperous future for our children.” Failure to do so risks substantial spending without commensurate industrial strength or sovereignty, potentially trading one form of dependency for another. The stakes have rarely been higher.