Defence Forecast 2025

Canadian defence in transition: An interview with Dr. David Perry on strategy and spending

Arbitration and commercial litigation partner, Thomas Yates, interviews Dr. David Perry, President of the Canadian Global Affairs Institute regarding future defence policy.

This interview took place on February 6, 2025, and has been edited for length and clarity.

TY: There has been a change of Prime Minister this year and potentially a change of government. Do you see this as having any meaningful impact in terms of defence strategy or spending?

DP: On spending, I think all the gyrations politically and Canada domestically mean that even the existing spending plans for national defence have an extra layer of uncertainty. Existing plans are that national defence is supposed to have a roughly 33 per cent increase in spending for the next fiscal year beginning April 1, 2025. But some of the mechanics to enable that spending are potentially going to get caught up in prorogation and a change in government at least once, if not twice.

We're potentially in a scenario where it is not until after Labour Day before you really get the next government up and running and briefed on major files. Even then, they're going to be inheriting a very complex geopolitical bilateral political dynamic with the United States. That will consume huge amounts of political bandwidth, which means that what is in motion right now and what has been planned for next fiscal year has a much higher level of risk and uncertainty around it.

In terms of strategy, I think there's probably less that would change in terms of the Canadian geopolitical defence and national security strategy, because in my view the two main political parties are far more in alignment on most of the substance than is generally recognised. However, in a scenario where the government changes and there is a new Prime

Minister from a different political party that wasn't involved in the roughly $250 billion spending commitment, I think it is reasonable to expect a degree of caution, an extra period of time, of wanting to fully understand the issues and get briefed on them before a government rushes to commit and contract such deals, even if they largely agree on the strategy.

I think that means that 2025 may not produce a lot in the short term just because of the mechanics of the transition in government.

TY: What effect do you think the threat of tariffs might have on defence procurement?

DP: I think it could have implications in several different ways. For one, I had not actually seen any evidence that there was going to be, as an example, a carve out for the defence and aerospace sectors as part the U.S. imposed tariff schedule. So that would have implications for Canadian firms that are involved in the U.S. market.

As an example, since there are a number of Canadian suppliers involved in the manufacture of the F-35, if those components have their costs increased by a quarter, I think it's reasonable to expect that the unit cost of the F-35 could increase by some amount going forward, which might impact some of our costing and our forecasting about what the expenses would be.

There are a number of other projects where there is Canadian supplied material going into U.S. final assembly weapon systems. If there isn't an exemption for Canadian products then that's potentially a problem from a cost standpoint alone. Canada is a significant producer of aluminium, titanium and other critical minerals that feed into American defence suppliers. If there aren't tariff exemptions from those inputs into the American system, even if we're just concentrating on a dynamic of buying from the United States, potentially that has price impacts in terms of some of those American pieces of equipment.

There is reflection happening in some places; recognising our dependence on the American supply chain. We had a bit of that during the first Trump administration, but they seem to have forgotten it. We had another reminder that supply chains were a thing that we should be attentive to during the pandemic, but we seemed to move on. But I think that there should be, and I think there has been, initial reflection on the fact that we might want to have some strategic resiliency in terms of some of our sourcing. This should be coupled with the existing initiative in national defence to develop a defence industrial strategy, a significant component of which is revolving around the concept of creating a sovereign defence capability.

I think that the dynamics of the start of the second Trump administration should really put some energy and some serious thought into Canada thinking more realistically about what types of sovereign capability, of various kinds—not just in defence but in other parts of the economy, that we might want in order to have a greater independent ability to build our own capacity and leverage that instead of being as reliant as we have been on American supply chains.

TY: Will Canada ever reach NATO's defence spending targets and what do you think the international implications might be if it doesn't, especially with the new administration in the U.S.?

DP: I think we're already seeing in part some of the implications of Canada having not just failed to meet those targets, but also not actually come forward with any clear indication that it would meet them until a political commitment by the Prime Minister last July at the NATO summit that we would meet our two per cent spending threshold by 2032. However, this is a political commitment, and as yet is unsupported by any national defence plan that's been approved to get there, or by the funding required to reach that threshold.

Part of the dynamic we've seen with the current Trump administration is that the metric is a clear and measurable indicator of relative Canadian burden sharing that does not exist in a number of other sort of wider sets of issues related to national security efforts, intelligence gathering, international affairs, where there's also some frustration about the Canadian level of effort, but which lack a clear metric like the NATO investment pledge target.

You now have only 10 of 30 NATO members that are currently short of the two per cent spending target—although most of them are a lot closer than Canada and almost all of them have plans to get there. There are still countries falling short, but there's a lot fewer of them, and I think that makes Canada's failure to live up to our own commitments stand out even more.

In terms of whether we're going to get there, I hope that we do because I think that we are starting to already see that there are real implications of us not doing that, especially considering the new three per cent spending commitment suggested by the NATO secretary general.

As of today, my expectation is that Canada will not get to the two per cent mark unless there is a significant change in both the funding allocations to national defence as well as a significant change in how the federal government collectively operates. We would have to significantly change how much attention and focus the Government collectively puts on national defence to enable that level of spending.

Even at two per cent, it would see a reallocation of how much of the direct spending on programmes the federal government devotes to national defence, at least doubling from it being something in the order of 20 per cent to probably over 40 per cent of federal expenditures on direct programmes shifting to national defence. This would require a significant change in behaviour by the Government to enable that level of spending. There hasn't been much shift in that direction, including on things like the procurement review, which really at this point hasn't yet produced much of substance.

TY: Assuming there is an increase in defence spending, in which areas do you see the increased spending?

DP: There's a whole bunch. The Department of National Defence has talked a lot in their last policy about fixing some of their foundations. For decades, if not generations, in a resource scarce environment, they have under invested in their built infrastructure. Their real estate portfolio, building works, airstrips, air facilities, ports, jetties and training facilities haven't been invested in properly. Consequently, there's a huge infrastructure deficit that could be made-up for in terms of just physical infrastructure.

The forces are also trying to undergo digital transformation which requires a huge investment to digitise the operations of national defence connected to modern computing technology. Significant investment is also required to increase personnel. There is currently no funding to increase beyond the 71,500 troop strength that was authorised in the 2017 defence policy. This hasn't been revised upwards to account for about a $200 billion worth of additional capability commitments made as part of NORAD modernization and Our North, Strong and Free defence review.

Beyond that, there's a significant requirement to put more money into some of the key enablers of military readiness. There are chronic maintenance backlogs that have built up in some of our fleets. We haven't been buying enough spare parts and haven't been putting enough funding into maintaining our equipment assets to keep them serviceable. There is a big backlog of under investment in maintenance and in service support that needs rectifying, even without looking at new investments such which have been identified as part of the last defence policy but haven't yet been funded. These include new submarine capability, modernization of the core vehicle fleets of light armoured vehicles for the army as well as its armoured units, integrated air missile defence capability.

Finally, I think we're in a situation where clearly our army is far too small. Regardless of how it gets specifically equipped, it's insufficiently large to do all the things that it is being tasked to do. We should be carving out some dedicated resources if we are going to continue to call upon the armed forces to assist with domestic environmental disasters and other consequence management scenarios in Canada for floods, forest fires, etc. If we're not going to look at creating something like FEMA (the U.S. Federal Emergency Management Agency) and we're going to call on the Canadian military to perform that role, then we should formally recognise and resource them to be able to do that.

TY: In a time of a cost of living crisis and pressures on public services, how would you justify any proposed increase in defence spending?

DP: In a couple of different ways. I think bluntly it's necessary. I also think that you've seen a fairly significant shift in Canadian public attitudes towards this that has been a positive indicator. I would observe this is essentially happening in largely a leadership vacuum on this issue on the part of political leadership in this country.

I would argue that in respect of defence and security, over the last decade, there has been the lowest ratio of senior political communication time to dollars allocated on any potential policy file. They've committed a huge amount of money, but they've committed far less time, certainly that of the prime minister, to explain it, outline the need for it, let alone move it forward.

But even with that, in the last couple of years, we've seen a significant change in public support for increased defence expenditure, notwithstanding the fact that the government hasboth committed a lot of extra money but also not spent much time trying to convince people of the need to do so. I think that there's huge amount of untilled ground for politicians to lead on that issue in Canada.

TY: If you could make one change to the defence procurement process, what would it be?

DP: Make it a top five priority of the Prime Minister.

TY: What prediction for global affairs in the next year would you make that might surprise some people?

DP: That not much is likely to change in Canada substantively in 2025 because of the transition in government, which is going to interrupt even the plans that are underway. I also don't think people fully realise the time lag involved on even executing on commitments already made. Nor do people really realise that most of the investments that we are starting to make in a meaningful way now date back to commitments made in 2017, not the ones made last year, or the ones made in 2022. We're now delivering on Strong, Secure, Engaged—the 2017 defence policy.

I think it's safe to assume about a minimum five-year time lag between policy announcement and actual meaningful investment, which means we shouldn't really expect to see much movement on the NORAD modernization announcements from 2022 until about 2027. Similarly, for the announcements made about Our North, Strong and Free defence review or anything that might come out of the political commitment to two per cent defence spending, realistically, we shouldn't expect much movement on those until about 2030 absent a really consequential change in mindset, attitude, behaviour and wholesale orientation of the Government of Canada, which isn't yet happening

Four procurement priorities shaping Canada's defence landscape

Authors: Graham Ragan and Stephanie Pearce

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 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 2032¹ . 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 Carney⁵ 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. 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.⁶

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.⁷ In response, Canada specifically pointed to the safeguards present in the Government Contract Regulations, and Canada's obligation to solicit bids.⁸

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.

AI adoption ramps up in Canadian defence and aerospace sectors

Author: Marc Crandall

There is little doubt that artificial intelligence will continue to revolutionize industries worldwide. Canada's defence and aerospace sectors are no exception, particularly in view of the current geopolitical environment.

In the months and years ahead, we can expect to see significant strides in the adoption of AI in these sectors. From air traffic management, predictive maintenance, intelligence, surveillance and reconnaissance, AI will play an integral role in future innovations and, thus, future spending.

Like with all new technological innovations, there are many considerations beyond the purely technical that must be considered when integrating AI. From ethical and policy issues, to privacy, regulatory compliance and intellectual property considerations, using and integrating AI will require planning and a detailed understanding of risks.

To successfully navigate these issues, Canada's defence and aerospace sectors will need clear and focused strategic advice.

How Canada is integrating AI in defence and aerospace

In 2024, Canada's Department of National Defence ("DND") and the Canadian Armed Forces ("CAF") developed an AI strategy explaining how AI has the potential to disrupt and transform both the conduct of military operations and the management of corporate functions.⁹ AI initiatives to date within DND/CAF are fragmented and lack a consistent roadmap, which DND's AI strategy is meant to address.

In fleshing out its AI strategy, we can expect to see DND/CAF continue adopting and leveraging AI to enhance many aspects of their operations. In other words, AI is likely to find its way into a wide array of areas in the defence sector. Like many of Canada's allies, the use of AI in intelligence, surveillance and reconnaissance ("ISR") analysis and cyber security threat detection and analysis, are some immediate areas where the use of AI can be adopted and expanded.

The aerospace industry in Canada is also experiencing a massive shift with the integration of AI in many areas of technology. Two key examples include:

• AI being used to enhance aircraft maintenance with predictive maintenance by using historical and failure data (for example from sensors) to predict the future health of equipment and optimize maintenance scheduling.
• AI being used in air traffic management and in-flight operations, for example in the use of tools to analyze and improve flight schedules.¹⁰

While we are still in the early days of AI adoption, Canada's defence and aerospace sectors have clearly shown their interest in using this technology now, and presumably going forward.

Opportunities and risks in AI deployment

Going forward, we can expect further development and integration of AI in the defence and aerospace sectors. On the horizon are a vast number of projects where AI can play a significant role. From the development of AI powered autonomous systems (e.g. drones), to the development of even more sophisticated AI-powered analysis tools to assist in human decision making, AI will no doubt be an important technological component of future research and development.

AI adoption in general, and in particular in the defence and aerospace sectors, is not without challenges. Issues such as data privacy, ethical considerations (e.g. the need for a human in-the-loop decision making), regulatory compliance and intellectual property considerations must be addressed to ensure the responsible and effective use, adoption and integration of AI technologies.

Data is perhaps the most important component of AI integration. The ability to customize or refine commercial or open-source general purpose AI models requires high amounts of high-quality data. Integrating AI for specific applications will require a detailed review of data use. For example, determining data ownership, data residency (where, geographically, data is stored) and safeguarding valuable data will be key to protecting investments in AI technologies.

Preparing for what's next

Canada has sophisticated and well-established defence and aerospace industries with significant R&D capabilities.¹¹ These industries are well positioned to leverage the expected growth in the use of AI. There is massive spending in the forecast over the next few years in the defence and aerospace sectors,¹² and no doubt a large portion of this spending will be on AI-related initiatives.

AI offers tremendous opportunities for Canada's defence and aerospace sectors, but also introduces complex legal, ethical and operational risks. As adoption accelerates, businesses and government alike will need to understand the broader AI landscape—both in Canada and globally—and seek strategic guidance to ensure responsible, secure and effective implementation.

As AI technologies continue to evolve, their role in shaping the future of the defence and aerospace industries will undoubtedly become even more critical.

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Footnotes

1 Canada says it expects to spend 2% of GDP on defence by 2032, but no specific details provided, CTV News, July 11, 2024.

2 Defence minister accelerates 2% NATO spending timeline to 2027 amid pressure from Trump Blair says meeting obligation within 2 years is 'absolutely achievable', by A. Burke, CBC News Jan 24, 2025.

3 Update of Canada's Military Expenditure and the NATO 2% Spending Target, by M. Creighton, A. Kho, Office of the Parliamentary Budget Officer, July 8, 2024

4 Poilievre's Conservatives say they would adopt Trudeau government's military budget increases, by A. Ballingall December 13, 2024.

5 Mark Carney commits to 2% NATO defence spending benchmark by 2030 by A. Burke, February

6 Ibid at footnote 5.

7 A time for Change: Reforming Defence Procurement in Canada, June 2024.

8 Government Response to the Twelfth report of the Standing Committee on National Defence

9 https://www.canada.ca/content/dam/dnd-mdn/documents/reports/ai-ia/dndcaf-aistrategy.pdf

10 https://www.itworldcanada.com/article/it-turns-out-that-the-sky-is-not-the-limitfor-ai-in-aerospace-industries/547851

11 State of Canada's Aerospace Industry (2024); State of Canada's Defence Industry (2024)

12 See, for example, The Fiscal Implications of Meeting the NATO Military Spending Target

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