By Matt Page and Eymeric Boyer

Amid intensifying geopolitical threats and growing pressure from NATO allies, Canada’s defense sector is undergoing its most significant transformation in decades. After years of underinvestment, Ottawa is stepping up with renewed ambition — but translating budget into battlefield capability will require more than just funding.

A renewed commitment to defense spending

For much of the 2010s, Canada’s defense budget languished at ~1.0% of GDP, far below NATO’s 2% target. This period of stagnation contributed to an aging fleet, readiness shortfalls, and mounting personnel gaps.

In early June 2025, Canada made a bold move: accelerating its then 2% NATO target timeline to FY 2025–26, five years ahead of the initial plan. With spending now at ~1.37% of GDP (CAD 40 billion), this new trajectory reflects a decisive pivot from correction to acceleration.

While Canada is finally catching up with the 2% spending guideline, the new NATO agreement (as of late June 2025), aims for members to eventually dedicate 5% of GDP to total defense-related spending, with 3.5% spent on defense and 1.5% spent on infrastructure, which could present a significant challenge for Canada. Moving from its current baseline to anything approaching this target will require a historic shift in political will, budget prioritization, and defense procurement efficiency. While Canada is making progress, it still has a long way to go. In practical terms, Canada would need to more than quadruple its defense budget.

Modernization is underway, but delivery risks loom

Major recapitalization efforts are advancing across air, land, sea, cyber, and space domains:

• Air: Procurement of F-35 stealth fighters and P-8 patrol aircraft is underway.
• Land: Logistics vehicle programs and Leopard 2 upgrades aim to bolster ground forces.
• Naval: The National Shipbuilding Strategy is delivering Arctic patrol vessels and support ships.
• Cyber/Space: Counter-UAS systems and AEW&C aircraft are being prioritized.

Yet despite this momentum, Canada remains heavily reliant on foreign suppliers, particularly the United States. Delays, cost overruns, and fragmented procurement processes continue to challenge the timely delivery of these programs.

A fragmented industrial base struggles to scale

Canada’s defense industry is robust in areas such as shipbuilding, land systems (e.g., LAVs), and MRO services, but is dominated by Tier 2 and Tier 3 suppliers. This limits the country’s ability to deliver complete, sovereign systems and fully capture the economic value of its investments.

Export activity is healthy — with nearly 50% of output going abroad — but 63% of exports go to the U.S., exposing Canadian firms to policy shifts south of the border. Additionally, industrial strength is unevenly distributed, with Ontario and Atlantic Canada overrepresented, while Quebec’s aerospace and munitions potential remains under-leveraged.

Procurement is the bottleneck

Procurement cycles for significant capital projects often take 10–15 years, eroding readiness and increasing costs. The issues are systemic:

• Budget decisions often precede precise operational requirements.
• Procurement is compliance-heavy, with limited room for innovation.
• Industry engagement is minimal, especially with SMEs.
• Legal and procedural hurdles slow project awards and the delivery of capabilities.

This chronic inefficiency undermines Canada’s ability to respond quickly to emerging threats.

Strategic gaps threaten sovereignty

Key capability shortfalls have emerged across domains:

• Arctic surveillance: Gaps in radar coverage and forward basing.
• Cyber & space: No sovereign satellite comms or ISR assets.
• C4ISR systems: Outdated and overly reliant on U.S. protocols.
• Strategic mobility: Airlift and refueling capacity are aging and constrained.
• Munitions: Surge production capacity is minimal, with heavy reliance on U.S. sources.

These gaps pose growing risks to both NATO readiness and national sovereignty, especially in the Arctic.

A wave of opportunity for industry and investors

This strategic reset opens up a unique window of opportunity for a wide range of players across the ecosystem:

• Domestic defense companies can scale up to meet surging demand and secure leadership roles in key programs.
• Non-defense industrial players can enter adjacent markets in cyber, AI, logistics, and infrastructure through dual-use pathways.
• Foreign OEMs have an opportunity to localize production, form strategic alliances, and fill capability gaps where domestic options are limited.
• Engineering service firms can support program ramp-up, core and ancillary infrastructure delivery, and procurement reform.
• Investors stand to benefit from multi-decade tailwinds, with opportunities to back consolidation plays or form joint ventures with Tier-2/3 suppliers.

Overreliance on U.S. Platforms and Procurement

Canada’s defense posture has long been closely aligned with the United States, and this deep integration—most notably through NORAD and the Five Eyes intelligence alliance—grants Canada access to world-class military capabilities. But it comes at a cost: constrained autonomy, limited domestic capacity, and exposure to U.S. policy shifts.

• Canada’s air force is nearly entirely U.S.-dependent: 100% of fighter aircraft, 91% of helicopters, and over 75% of other mission aircraft originate from the U.S.
• In cyber, space, and Arctic operations, Canada relies heavily on U.S. systems, protocols, and satellite infrastructure—undermining its sovereignty in high-stakes domains.
• This dependency extends into defense trade. Roughly 63% of Canadian defense exports go to U.S. buyers, increasing vulnerability to regulatory changes or political pressures south of the border.

Why Canada Needs Europe

Amid rising global instability — from Eastern Europe to the Indo-Pacific — Canada faces a strategic imperative to diversify its alliances and reduce systemic vulnerabilities. A more balanced transatlantic posture offers both strategic and economic upside.

Formalized Transatlantic Cooperation: The defense and security partnership signed in late June between Canada and the European Union marks a major step forward in institutionalizing transatlantic collaboration. It signals a clear shift from a primarily North American defense orientation toward a more integrated engagement with Europe’s evolving defense architecture.

Complementary Capabilities: European partners bring industrial strengths in areas such as shipbuilding, cyber resilience, and defense innovation. Deepening partnerships with these allies enables Canada to reduce procurement bottlenecks, benefit from more agile European acquisition models, and co-develop next-generation systems aligned with NATO and Five Eyes priorities.

Diversified Supply Chain: Strengthening ties with Europe helps mitigate single-source procurement risks, particularly in critical domains such as submarine technology, satellite systems, and advanced weaponry — areas where Canadian capabilities can be scaled and integrated into European programs.

As the global defense landscape grows more complex, Canada’s strategic autonomy — and its ability to meet increasing security commitments — may hinge on how swiftly and decisively it rebalances its partnerships beyond the U.S.

To realize this opportunity, Canada must now accelerate industrial and R&D collaboration with EU defense players, prioritize interoperability and co-development, and actively pursue export growth in European markets, particularly in niches where Canadian firms are already competitive.

How can we help

As the leading strategy consulting firm of European heritage — with a strong track record in the global defense sector — we stand ready to support companies navigating these challenges. Whether entering the Canadian market, localizing operations, accelerating industrial scale-up, or advising on procurement strategies, we bring the insight and experience needed to help clients move with confidence.