NyRAD

By Stephanie Batstone, Managing Partner, NyRad

Canada’s Industrial and Technological Benefits (ITB) Policy is intended to leverage defence procurement to generate long-term economic benefits for Canada. Historically, the concept behind the policy was relatively straightforward: suppliers awarded major defence contracts would undertake business activity in Canada equal to the value of the contract.

Over time, however, the cost of meeting ITB obligations in Canada has increased significantly. This increase is not, but rather by the growing complexity and rigidity of Canada’s Value Proposition (VP) framework, combined with increasingly restrictive approaches to multipliers, crediting mechanisms, and compliance management.

As Canada significantly expands defence spending, understanding why offsets are becoming more expensive is increasingly important. The issue is not whether Canada should pursue ambitious industrial objectives. The issue is whether the current framework achieves those objectives efficiently and cost-effectively.

Understanding Canada’s ITB and Value Proposition Framework

Under Canada’s ITB Policy, contractors awarded eligible defence procurements must undertake business activity in Canada equal to 100% of the contract value. In addition to this obligation, bidders are evaluated through the Value Proposition framework, which is intended to encourage investments in areas important to Canada’s defence industrial base.

The VP framework typically requires bidders to make commitments across several pillars, including:

• Direct Work in Canada;
• Supplier Development;
• Research and Development (R&D);
• Skills Development and Training; and
• Export Development.

Importantly, many of these commitments become contractually binding obligations once a contract is awarded. While the VP framework was originally intended to encourage broader industrial participation and innovation, its implementation has increasingly evolved into a highly prescriptive compliance regime.

The Growing Cost of Value Proposition Requirements

Historically, bidders had greater flexibility to determine how best to meet Canada’s industrial objectives. Companies could tailor industrial participation strategies based on their existing supply chains, business models, technological strengths, and long-term investment plans. This flexibility encouraged innovative and differentiated industrial approaches.

Increasingly, however, Innovation, Science and Economic Development Canada (ISED) has shifted toward applying mandatory minimum commitment levels within each VP pillar, combined with rated requirements above those thresholds. In practice, this means that bidders are no longer simply competing on who can deliver the best overall industrial outcome for Canada. Instead, they are frequently required to meet mandatory targets across multiple categories regardless of whether those activities represent the most efficient or highest-value solution.

This approach significantly increases costs.

Some ITB activities are substantially more expensive to undertake than others. R&D investments, workforce development initiatives, and SMB supplier development activities often require long-term investments. By requiring commitments across all pillars simultaneously, the framework limits a company’s ability to optimize how it meets its obligations.

Rather than allowing companies to concentrate investments where they can generate the greatest industrial impact, the current framework increasingly forces bidders toward similar compliance-driven strategies. This reduces differentiation between bidders and limits the ability of industry to provide innovative or best-value solutions.

The growing complexity of the VP framework also introduces significant administrative burden. Companies must now manage increasingly detailed reporting requirements and long-term verification processes. The current system has become highly compliance-driven, with lengthy approval timelines for ITB activities and growing administrative complexity.

In many cases, these obligations extend years beyond platform delivery, creating long-term contractual liabilities and compliance costs that bidders ultimately factor into their pricing.

Canada’s Restrictive Use of Multipliers

The rising cost of offsets in Canada is further compounded by the country’s restrictive approach to ITB multipliers.

Multipliers are intended to serve two important policy purposes:

1. To incentivize investment in strategic industrial activities; and
2. To reduce the cost of offsets.

When used strategically, multipliers allow governments to direct investment into priority areas such as R&D, workforce development, technology transfer, and sovereign capability development while reducing the cost burden associated with offset obligations.

However, Canada has historically taken a far more restrictive approach to multipliers than many other offset jurisdictions. ISED has often viewed multipliers as an “easy way out” for contractors rather than as a strategic industrial policy tool. As a result, multiplier use in Canada is frequently constrained through rigid policy “fenceposts” that significantly reduce their effectiveness.

One example is the 25% cap applied to R&D investments with Canadian SMBs. While Canada technically provides a 9x ITB credit multiplier for these investments, the cap limits the practical ability of contractors to use these mechanisms meaningfully.

Similarly, Canada often delays the recognition of multiplied credits over extended timelines rather than recognizing investments when they are made. Again, using the case of R&D investments with Canadian SMBs, credits are often spread over five years regardless of the timing of the actual investment or R&D project. This significantly reduces the practical value of the multiplier, particularly on procurements with shorter achievement periods.

The cumulative effect of these restrictions is that multipliers frequently exist in theory while offering limited practical flexibility or cost reduction in execution.

When Compliance Costs More Than Capability

One of the more concerning consequences of Canada’s increasingly rigid offset framework is that, in some cases, the cost of fully completing ITB obligations may exceed the contractual penalties associated with non-compliance.

This creates a fundamental policy problem.

A framework designed to encourage industrial investment should not create conditions where paying penalties becomes economically rational compared to completing the obligations themselves. When compliance costs become excessively high, the system risks discouraging meaningful industrial participation and reducing the overall effectiveness of the policy.

This outcome is particularly important as Canada seeks to implement the objectives of the Defence Industrial Strategy, which emphasizes domestic production, resilient supply chains, workforce development, and innovation in the Sovereign Capabilities. Achieving these objectives will require strong industrial participation and long-term investment from both domestic and international firms.

Conclusion

Canada’s ITB framework has evolved considerably over time. While the underlying objectives of the policy remain important, the cost of undertaking offsets in Canada has increased significantly due to increasingly prescriptive Value Proposition requirements, mandatory commitments across multiple VP pillars, restrictive multiplier policies, and growing administrative complexity.

The result is a framework that increasingly emphasizes compliance over flexibility and outcomes.

As Canada continues to expand defence spending and implement the Defence Industrial Strategy, policymakers will need to consider whether the current approach is achieving Canada’s industrial objectives in the most effective and efficient manner possible. The challenge is not whether Canada should pursue ambitious industrial goals, but how to structure the ITB framework in a way that encourages investment, innovation, and sovereign capability development without unnecessarily increasing the cost of doing offsets in Canada.