NyRAD

By Stephanie Batstone, Managing Partner, NyRad

Canada’s Defence Industrial Strategy (DIS) establishes an ambitious vision for the country’s defence industrial base. It emphasizes sovereign capabilities, domestic production, resilient supply chains, workforce development, innovation, and Canadian intellectual property ownership as central pillars of Canada’s future defence and economic security.

Achieving these objectives will require substantial investment from both domestic and international industry participants. At the same time, Canada must recognize an important reality of defence procurement and offset policies: companies seek to meet offset obligations at the lowest possible cost. This is not unique to Canada or to offsets. It is the natural commercial behaviour associated with any contractual obligation.

The key policy question, therefore, is not whether offset obligations should be cost-sensitive, but how governments can strategically shape industry behaviour so that lower-cost compliance mechanisms also advance national industrial objectives. This is precisely the role that ITB multipliers should play.

Properly designed multipliers can reduce the cost of offsets while simultaneously accelerating investment into Canada’s sovereign defence industrial capabilities. However, Canada’s current approach often treats multipliers as a compliance concern or an “easy way out” for contractors rather than as a strategic industrial policy tool. If Canada intends to achieve the objectives outlined in the DIS, this approach must change.

The Strategic Purpose of Multipliers

Multipliers exist to serve two core policy objectives:

1. To incentivize investment into strategic economic activities; and
2. To reduce the cost of offsets.

A multiplier increases the amount of ITB credit earned for activities government considers strategically valuable. For example, a 5x multiplier provides $5 of ITB credit for every $1 invested into an approved activity. The purpose is not to reduce economic impact, but to direct investment toward activities that strengthen Canada’s long-term industrial and sovereign capability objectives.

The DIS already identifies where Canada wants industry investment to flow:

• sovereign capabilities;
• resilient domestic supply chains;
• Canadian innovation;
• workforce development; and
• long-term sustainment capacity.

The multiplier framework should be explicitly aligned with these priorities.

Technology Transfer and Domestic Production

Building sovereign capability requires far more than final assembly work performed in Canada. It requires the transfer of advanced technologies, production licensing, engineering know-how, and access to intellectual property that enable Canadian firms to manufacture, sustain, repair, and evolve defence systems independently over the long term.

Yet Canada’s current ITB framework does not adequately incentivize technology transfer. Companies that undertake technology transfer activities often receive little or no direct credit for the transfer itself, with credit instead tied to uncertain future sales outcomes. This creates unnecessary risk and discourages large-scale investment into Canadian industrial capability. In contrast, many other offset countries strategically incentivize technology transfer because they recognize it as one of the most effective ways to build long-term domestic industrial capacity.

Canada should adopt a similar approach by introducing enhanced multipliers for technology transfer activities within the Sovereign Capability sectors identified in the Defence Industrial Strategy. Properly structured multipliers would encourage foreign contractors to invest in Canadian manufacturing capability, engineering expertise, sustainment infrastructure, and Canadian-controlled intellectual property rather than limiting activity to short-term industrial participation.

Over time, these investments would help Canada build deeper domestic production capability, strengthen sovereign sustainment capacity, develop advanced technical expertise within Canadian firms, and reduce long-term dependence on foreign suppliers for critical defence systems and technologies.

Expanding R&D and Canadian SMB Innovation

One of the strongest existing multiplier mechanisms within the ITB framework has been the 9x multiplier for eligible R&D investments involving Canadian SMBs. This mechanism has successfully directed private-sector capital into Canadian innovation.

However, Canada has significantly reduced its effectiveness through rigid policy constraints.

The current 25% cap on Innovation Framework investments limits the scale of strategic R&D investment that contractors can undertake. Similarly, the practice of spreading multiplied credits over five-year timelines substantially reduces the practical value of these investments, particularly for procurements with shorter achievement periods.

Canada should:

• remove the 25% cap on Innovation Framework investments; and
• recognize multiplied credits at the time investments are made.

These changes would accelerate investment into Canadian innovation ecosystems and strengthen the growth of Canadian-owned IP and advanced technologies.

Workforce Development as a Sovereign Capability

The DIS appropriately recognizes workforce development as a core industrial challenge. Canada cannot expand sovereign capability without the skilled workforce required to support advanced manufacturing, engineering, sustainment, cyber, digital systems, and defence innovation.

Canada previously employed broader workforce development multipliers but has narrowed these mechanisms over time. NyRad recommends reintroducing and expanding workforce development multipliers, including a 5x multiplier for strategic training and skills development investments, without restrictive caps or limitations that undermine their usefulness as incentives.

A strong industrial workforce is itself a sovereign capability issue, and the multiplier framework should reflect that reality.

Strengthening Canadian SMBs and Supply Chain Participation

Small and medium-sized businesses account for 92% of Canada’s defence industrial base and are critical drivers of innovation, niche technologies, and supply chain resilience. If Canada intends to deepen domestic industrial participation, the ITB framework must place greater emphasis on incentivizing direct work with Canadian SMBs.

Canada should introduce an enhanced multiplier specifically for Direct Work performed with Canadian SMBs. Integrating SMBs into major defence programs is often more administratively complex and commercially risky than relying on established global suppliers, but these investments generate significant long-term benefits through industrial growth, workforce expansion, innovation, and supply chain resilience.

A dedicated SMB multiplier would help offset these costs while supporting the objectives of the Defence Industrial Strategy.

Incentivizing Investment in Canadian Production Capacity and Innovation

If Canada intends to build sovereign capability, the ITB framework must do more to incentivize investment into domestic production capacity and innovation.

Canada should introduce a dedicated multiplier framework for investments that support:

• manufacturing expansion;
• production infrastructure and tooling;
• advanced manufacturing technologies;
• sustainment capability;
• R&D and commercialization; and

These multipliers should apply both to offshore companies investing into Canadian firms and to Canadian companies investing in themselves.

Under the current framework, Canadian firms often face significant barriers to obtaining ITB credit for investments into domestic production expansion or IP development due to rigid causality and incrementality requirements. Canadian companies expanding production capability or developing Canadian-owned IP contribute directly to the objectives of the Defence Industrial Strategy and should also be eligible for enhanced ITB credit through the use of multipliers.

Removing Policy Fenceposts That Undermine Multipliers

To maximize the effectiveness of multipliers, Canada should move away from a rigid, compliance-driven approach and adopt a more flexible, strategic framework aligned with the objectives of the Defence Industrial Strategy. Multipliers should be designed to encourage investment, not constrained by excessive administrative “fenceposts” that limit their practical value. This means reducing unnecessary caps and restrictions, recognizing credit when investments are made, simplifying approval processes, and allowing the multiplier regime to evolve over time as Canada’s industrial priorities change. A flexible multiplier framework would give industry greater confidence to make long-term investments in alignment with the objectives of the Defence Industrial Strategy.

Conclusion

Canada’s Defence Industrial Strategy establishes ambitious objectives for sovereign capability, domestic production, innovation, workforce growth, and resilient supply chains. Achieving these objectives will require sustained industrial investment and long-term collaboration between government and industry.

ITB multipliers remain one of the most effective tools available to direct that investment strategically while reducing the cost of offsets.

However, Canada’s current approach often limits the effectiveness of multipliers through restrictive policies, rigid compliance structures, and narrow interpretations of industrial value. If Canada intends to fully leverage defence procurement as a strategic economic tool, it must modernize the multiplier framework to align directly with the objectives of the Defence Industrial Strategy.

Canada should treat multipliers not as a compliance concession, but as a strategic lever for building a sovereign, resilient, and globally competitive defence industrial base.