NyRAD

Canada’s Industrial and Technological Benefits (ITB) Policy is vital in leveraging federal defence procurements to support domestic industry. At its core, the Policy seeks to ensure that Canadian companies, particularly Small and Medium-Sized Businesses (SMBs), benefit meaningfully from federal investments in defence capability. Initiatives such as the 15% mandatory SMB participation requirement and targeted incentives like the Investment Framework transaction type, which offers up to a 9x multiplier for R&D investments with Canadian SMBs, demonstrate a clear intent to promote growth and innovation within this critical segment of the economy.

However, despite these well-intentioned mechanisms, there are emerging risks to Canadian SMBs that are not widely acknowledged in public or policy discussions but have become evident through repeated, real-world experience. In practice, certain features of the ITB Policy, particularly in how obligations are distributed and managed, are placing disproportionate burdens on SMBs. These unintended consequences are undermining the Policy’s stated goal of supporting small Canadian businesses.

At a time when maintaining and expanding Canada’s domestic defence industrial capability and capacity has never been more important, these issues must be addressed. The global security environment is shifting rapidly. Threats to traditional trade relationships, intensifying geopolitical tensions, and increasing concerns over national sovereignty all underscore the urgency of strengthening Canada’s defence industrial capacity. In this context, the ITB Policy must do more than direct work to Canadian companies; it must actively enable their sustained growth.

Refining the execution of the ITB Policy to better support SMBs is not a matter of relaxing standards or reducing accountability. Rather, it is a strategic imperative to ensure that the companies at the heart of Canadian innovation and capability development are not inadvertently disadvantaged by the very policy intended to support them. What follows is an outline of key areas where SMBs are experiencing undue burden and a set of practical recommendations for policy refinement.

1. SMBs as Eligible Donors: From Beneficiaries to Burden Bearers

In an effort to promote broader industrial participation, ISED permits Canadian SMBs to serve as “Eligible Donors” under the ITB Policy. This means that SMBs can be used by large contractors to fulfill their obligations by taking on obligations themselves, provided the SMB agrees and ISED approves. While seemingly an opportunity, in reality, this mechanism has led to an unintended consequence: SMBs are being asked to assume obligations that they are neither resourced nor experienced enough to execute.

Winning a subcontract has increasingly become contingent on accepting ITB obligations. SMBs, eager for business, often accept these obligations without understanding the long-term impact. Once committed, they must identify ITB-eligible investments, submit project justifications to ISED, and manage reporting obligations – a resource-intensive administrative burden. Worse still, if the activity does not meet ISED’s eligibility criteria, the SMB remains financially liable. In essence, large multinationals are shifting responsibility for their obligations onto the very companies the policy was designed to support.

2. SMBs as Prime Contractors: Facing Asymmetrical Barriers

When Canadian SMBs bid as Prime Contractors on defence procurements, they encounter a distinct and costly disadvantage. Understanding the ITB and Value Proposition (VP) requirements in RFPs requires expert knowledge. Unlike larger primes, SMBs typically do not have in-house policy experts or the budget to engage consultants. As a result, many try to interpret and manage the obligations independently, which often leads to critical errors.

Misinterpreting the policy can result in SMBs committing to obligations they are unable to deliver. Once awarded the contract, they face government officials who may appear inflexible or unsympathetic. This is not an environment designed for learning or collaboration; rather, it often feels punitive. These obstacles do not affect large, experienced primes, who have the capacity and infrastructure to navigate the ITB process effectively, creating an uneven playing field that discourages SMB participation.

3. The Causality Hurdle: A Higher Bar for Canadian SMBs

Even when a Canadian SMB wishes to undertake ITB obligations, whether as a donor or a prime, the Policy’s interpretation of Causality poses an excessive barrier. Under current rules, companies must demonstrate that their investment would not have occurred “but for” the ITB obligation. While larger companies can frame and justify investments with sophisticated documentation and internal resources, SMBs lack these tools and support. Often, their investments are deemed “business as usual” and, therefore, ineligible.

This means that while a multinational can earn credit for investing in a Canadian SMB or exporting a product overseas, a Canadian SMB attempting to do the same is held to a more difficult standard. In effect, SMBs must jump higher to receive credit for the same types of activities, resulting in a structural disadvantage compared to their multinational competitors.

Recommendations for Reform

To better align the ITB Policy with its stated goal of supporting Canadian SMBs, we propose the following changes:

1. Eliminate SMBs as Eligible Donors:

Canadian SMBs should not be permitted to serve as Eligible Donors under the ITB Policy. This change would prevent large contractors from offloading complex and burdensome obligations onto small companies with limited resources and compliance capacity.

2. Exempt SMB Primes from Indirect Obligations:

When a Canadian SMB successfully bids as a Prime Contractor, their ITB or VP obligations should be limited to Direct Canadian Content Value (CCV) only. This ensures fairness and allows SMBs to focus on fulfilling contracts without the additional administrative load of indirect ITB obligations.

3. Simplify Causality Requirements for SMBs:

When an SMB does take on an obligation, either as a Prime Contractor or as an Eligible Donor, they should be automatically eligible for credit for investments in themselves, their Canadian supply chains, or export development activities. The standard of proof for causality should be waived or significantly relaxed for Canadian SMBs.

Conclusion

Canada’s ITB Policy, though well-intentioned, is placing growing burdens on the very businesses it aims to support. By rebalancing the policy framework to protect and empower SMBs, the Government of Canada can ensure that economic benefits are truly flowing to Canadian industry, without unintentionally disadvantaging its most vulnerable and innovative companies.