NyRAD

By: Leigha Cotton, Managing Partner, NyRad

As discussed in the first two parts of this series, Canada’s ITB framework has become increasingly costly and complex. The growing rigidity of the Value Proposition framework, combined with restrictive approaches to multipliers, credit recognition, and transaction approvals, has made offset obligations more expensive to execute. At the same time, Canada has an opportunity to use ITBs far more strategically: to direct private-sector investment into the sovereign capabilities, technologies, production capacity, and workforce priorities identified in the Defence Industrial Strategy.

The question now is how to implement reform in a way that delivers lasting results.

This will require more than changes to the ITB Terms and Conditions. It will require clear policy direction, strong leadership, and an operating culture within the ITB Authority that supports both compliance and strategic economic development.

The Risk of Reform Without Implementation

Canada has been here before.

The 2014 Defence Procurement Strategy introduced important changes intended to use defence procurement as a lever for economic growth. The Value Proposition was designed to encourage bidders to bring forward industrial strategies that would deliver meaningful long-term benefits for Canada.

The challenge was not the ambition of the policy. The challenge was implementation.

Over time, the administration of the ITB Policy has become increasingly rule-bound. The Value Proposition framework has evolved into a more prescriptive compliance regime, with mandatory requirements, detailed subcategories, complex reporting obligations, and narrow interpretations of eligibility. The original policy intent, using defence procurement to strengthen Canada’s industrial base, has, at times, been overshadowed by the mechanics of proving compliance.

This is not to suggest that oversight should be weakened. Canada should maintain a rigorous ITB framework. Contractors receiving major defence contracts should be expected to deliver on their commitments. Public accountability matters.

But compliance should be a means to achieve economic outcomes, not the outcome itself.

When the system becomes overly focused on whether an activity fits neatly within existing rules, for example, whether internal R&D should be characterized as a “purchase transaction” or an “R&D investment”, it risks losing sight of the more important question: whether the activity advances Canada’s strategic defence industrial objectives. That risk is particularly important now, as the Defence Industrial Strategy calls for a more deliberate approach to building sovereign capability.

Canada does not need to choose between strong compliance and strategic economic development. A modernized ITB framework should deliver both. The implementation challenge is to ensure that rules, approval processes, and administrative practices are consistently guided by the broader industrial outcomes Canada is trying to achieve.

Leadership and a More Enabling Culture Are Essential

One of the most important implementation considerations is cultural.

In practice, industry often experiences the ITB approval process as highly cautious, with proposed activities subject to extensive scrutiny before they are accepted as eligible. Rigour is important, but when the starting point is overly restrictive, companies become less willing to bring forward creative or commercially meaningful investments that could otherwise support Canada’s defence industrial objectives.

This is where leadership within the ITB Authority is essential.

The ITB Authority needs to be empowered to deliver economic development outcomes, not simply administer contractual compliance. Its leadership must be able to communicate policy intent clearly, make timely decisions, resolve inconsistent interpretations, and engage industry in a manner that encourages investment.

In many other offset jurisdictions, industrial participation authorities engage obligors as economic development partners, working with them to shape proposed activities in ways that maximize strategic value while maintaining appropriate oversight. Canada could benefit from adopting more of this enabling posture, particularly as the Defence Industrial Strategy places greater emphasis on sovereign capability and long-term industrial outcomes.

This does not mean weakening accountability. An effective ITB Authority should be able to say no when an activity does not advance Canada’s objectives. But it should also be actively looking for ways to support credible opportunities that contribute to sovereign capability, domestic production, innovation, workforce development, or supply chain resilience.

The ITB Authority should be empowered to ask: Does this activity help build the Canadian defence industrial base? Does it support sovereign capability? Does it advance domestic production, technology transfer, workforce development, innovation, or supply chain resilience? If so, how can the policy framework enable it while maintaining appropriate oversight?

That is a different question than asking only whether an activity fits within the narrowest possible interpretation of existing eligibility rules.

The 100% Obligation Should Not Become the Only Measure of Success

Canada’s requirement that contractors undertake business activity in Canada equal to 100% of the contract value remains a central feature of the ITB Policy. It is an important accountability mechanism and a clear signal that defence procurement should generate economic benefit for Canada.

However, the pursuit of 100% achievement should not become disconnected from the quality, strategic value, or long-term impact of the underlying activity.

This is where policy leadership and discretion matter.

The ITB Authority should continue to hold contractors accountable for their obligations. But it should also have the mandate and flexibility to assess the strategic value of proposed activities and apply crediting approaches that reflect the nature of the investment. Where an activity clearly advances Canada’s defence industrial priorities, the crediting framework should be able to recognize that value.

In some cases, this may mean treating strategically significant activities differently than routine transactions. It may mean recognizing credit earlier, applying enhanced multipliers, accepting alternative evidence of impact, or structuring achievement milestones in a way that reflects the realities of the investment. The objective should not be to weaken the 100% obligation, but to ensure that the path to achieving it does not discourage the very investments Canada is trying to attract.

A modernized ITB Policy should measure success through both compliance and strategic value. Full credit achievement remains important, but it should not be the only indicator that matters. The more important question is whether ITB activity is helping Canada build the capabilities identified in the Defence Industrial Strategy.

If both Canada and industry benefit from an investment that strengthens sovereign capability, expands domestic production, supports innovation, or builds long-term resilience, the ITB framework should be flexible enough to recognize that success, even when the activity doesn’t check all the templated boxes or fit squarely into a defined transaction type.

Supporting Alignment Through Clear Policy Direction

To support implementation, Canada should consider publishing a short guiding policy paper or implementation statement explaining how the ITB Policy will support the objectives of the Defence Industrial Strategy.

This would not need to be a detailed rewrite of the ITB Terms and Conditions. Rather, it could serve as a practical tool to clarify policy intent, provide continuity over time, and help both government and industry understand how ITB decisions will be aligned with Canada’s defence industrial priorities.

Such a document could also clarify how the ITB framework will operate alongside Canada’s emerging Buy Canadian policy and the Build-Partner-Buy framework. This will be important to avoid creating overlapping policy regimes administered by different departments, using different definitions, incentives, or measures of Canadian content. If the Defence Industrial Strategy is intended to guide decisions about when Canada should build domestically, partner with allies, or buy from existing suppliers, the ITB Policy should reinforce that framework rather than operate in parallel to it.

Clearer public guidance would also help address one of the recurring challenges in ITB administration: ensuring that decisions are guided not only by the technical application of rules, but also by the broader policy purpose behind them.

A guiding policy paper or implementation statement could reinforce a shared understanding of what the modernized ITB Policy is intended to achieve. It could support consistency within government, improve predictability for industry, and provide a useful reference point as personnel, procurement priorities, and market conditions evolve.

Conclusion

Canada’s planned ITB reforms come at an important moment.

Defence spending is increasing. The Defence Industrial Strategy has set a more ambitious direction for Canada’s defence industrial base. Industry is prepared to invest, but it needs a policy environment that is predictable, commercially realistic, and focused on strategic outcomes.

The challenge is not whether Canada should maintain a rigorous ITB Policy. It should. The challenge is ensuring that rigour supports, rather than undermines, Canada’s broader defence industrial objectives.

If Canada wants the ITB Policy to help deliver the Defence Industrial Strategy, implementation must be guided by strong leadership, clear policy direction, and a culture that views industry as a partner in economic development. The ITB Authority should continue to ensure contractors meet their obligations, but it should also be empowered to help shape those obligations into investments that build real capability in Canada.

A modernized ITB Policy should not measure success only by whether obligors reach 100% credit. It should measure success by whether those credits translate into sovereign capability, Canadian innovation, stronger supply chains, skilled workers, and a more resilient defence industrial base.

That is the opportunity now before Canada. The rules matter, but they should be applied in service of the economic and security outcomes Canada is trying to achieve.