Canada's innovation ecosystem is gaining serious momentum. Just weeks after Budget 2025 delivered the most significant SR&ED program enhancements in over a decade, the federal government announced a $357.7 million Regional Defence Investment Initiative (RDII) aimed at strengthening the country's defence supply chain and accelerating integration of Canadian businesses into domestic and international defence markets.

Together, these investments signal a coordinated federal strategy to support innovative businesses across the country, whether they're developing dual-use technologies, advancing R&D capabilities, or scaling manufacturing operations.

Breaking Down the Regional Defence Investment Initiative

Announced on December 5, the RDII will be deployed by Canada's seven Regional Development Agencies (RDAs) over three years, starting in 2025-26. The program targets small and medium-sized businesses that are either already active in defence supply chains or looking to position themselves within the sector, including companies with dual-use products and services that serve both civilian and military applications.

Key RDII Details:

  • Total Funding: $357.7 million distributed nationally through RDAs including FedDev Ontario ($94.7M + $106M reallocation), ACOA ($38.2M), and PrairiesCan ($48M+)
  • Funding Structure: Primarily zero-interest loans (repayable contributions) to eligible businesses
  • Timeline: April 2025 through March 2029 (3-year program with 4-year project completion window)
  • Eligible Activities:  
    • Digitization, automation, and technology integration to enhance productivity
    • Market development and commercialization strategies
    • Acquisition of certifications required for defence supply chain integration
    • Equipment acquisition and facility expansion/modernization
    • Development or adaptation of dual-use technologies

The RDII is explicitly designed to complement the forthcoming Defence Industrial Strategy (DIS), which will see nearly $7 billion invested over five years to build Canada's defence industrial base. Minister of AI and Digital Innovation Evan Solomon emphasized the transformative nature of this investment: "This is real. This is not a new program. This is a new Canada."

The Perfect Complement: SR&ED Program Enhancements from Budget 2025

The RDII doesn't exist in isolation: It's part of a broader federal strategy that includes transformative changes to Canada's largest R&D tax incentive program. Budget 2025, tabled on November 4, delivered historic SR&ED enhancements that benefit many of the same innovative businesses the RDII aims to support.

Major SR&ED Enhancements (effective for taxation years beginning on or after December 16, 2024):

Doubled Expenditure Limits

The enhanced 35% refundable credit expenditure limit jumped from $3 million to $6 million for eligible Canadian-Controlled Private Corporations (CCPCs). This means qualifying companies can now claim up to $2.1 million annually in refundable cash back; double the previous maximum of $1.05 million.

Expanded Eligibility to Public Companies

For the first time, eligible Canadian public corporations can access the enhanced 35% refundable credit (subject to ownership and control requirements). This expansion opens substantial benefits to innovation-driven listed companies and their subsidiaries that were previously limited to the 15% non-refundable credit.

Capital Expenditures Are Back

After years of exclusion, capital expenditures for equipment, machinery, and facilities used directly in R&D are once again eligible for both the SR&ED deduction and investment tax credit. For capital-intensive sectors like manufacturing, aerospace, and defence, this represents a game-changing benefit.

Streamlined Administration (launching April 1, 2026)

The Canada Revenue Agency will implement transformative reforms including:

  • Optional pre-claim approval process for up-front technical validation (cutting review times from 180 to 90 days)
  • Increased use of artificial intelligence to reduce audits for low-risk claims
  • Simplified documentation requirements and streamlined review procedures

Raised Phase-Out Thresholds

The taxable capital thresholds for the enhanced credit increased from $10-50 million to $15-75 million, allowing growing businesses to retain access to higher refundable rates as they scale.

Where Defence Innovation Meets R&D Tax Credits

The alignment between RDII and SR&ED creates powerful opportunities for Canadian businesses operating at the intersection of innovation and defence:

Dual-Use Technology Companies

Companies developing technologies with both civilian and military applications—think AI, cybersecurity, quantum computing, advanced materials, sensors, robotics—can leverage RDII funding to accelerate market entry while using SR&ED credits to offset ongoing R&D costs. The restored capital expenditure eligibility under SR&ED is particularly valuable for businesses that need specialized equipment for both technology development and defence certification.

Manufacturing Sector

Budget 2025 positioned manufacturers as the biggest winners through multiple complementary programs. A manufacturing company working on defence contracts could potentially:

  • Access RDII funding (via zero-interest loans) for facility modernization and defence certification
  • Claim up to $2.1M in refundable SR&ED credits on qualifying R&D expenses, including eligible capital equipment
  • Take advantage of immediate 100% expensing for manufacturing buildings acquired after November 4, 2025
  • This triple benefit substantially reduces the marginal effective tax rate and improves cash flow for capital-intensive innovation.

Supply Chain Integration

The RDII explicitly aims to accelerate business integration into domestic and international defence supply chains. Companies pursuing this strategy often need to make significant investments in:

  • Specialized certifications and quality standards (AS9100, ISO 9001, ITAR compliance)
  • Production capabilities that meet defence specifications
  • Security infrastructure and cybersecurity measures

Many of these activities—particularly technology development, process innovation, and experimental work to meet new specifications—may qualify for SR&ED credits, while RDII can support the capital investments and market development required for supply chain entry.

Research and Development Scaling

Innovative companies often face the challenge of transitioning from R&D to commercialization, particularly when entering highly regulated defence markets. The combination of RDII and SR&ED allows businesses to:

  • Use SR&ED credits to fund core R&D activities and technology development
  • Leverage RDII funding for the commercialization, market development, and infrastructure investments needed to bring innovations to defence markets
  • Maintain healthy cash flow through refundable credits while deploying zero-interest RDII loans strategically

Strategic Timing: Canada's Innovation Investment Moment

These parallel investments arrive at a critical time for Canadian innovation. With increased focus on sovereign capabilities, defence readiness, and supply chain resilience, the federal government is creating an ecosystem where businesses can access multiple forms of support:

Budget 2025's Productivity Super-Deduction reduced Canada's marginal effective tax rate to 13.2%—the lowest in the G7—through a package of capital investment incentives that work alongside SR&ED.

The Strategic Response Fund provides additional support for Canadian businesses pursuing market diversification, retooling, and innovation-driven growth.

Clean Economy Investment Tax Credits continue to support businesses in critical mineral processing, clean technology manufacturing, and carbon capture technologies.

IP Support Programs including Elevate IP, the Patent Collective, and IRAP IP Assist help Canadian companies secure and leverage their intellectual property.

The RDII adds another critical piece to this puzzle, specifically targeting defence and security sectors while embracing the dual-use innovation that characterizes modern technology development.

What This Means for Canadian Businesses

For companies at the intersection of innovation, manufacturing, and defence, the message is clear: the federal government is making significant, coordinated investments to support your growth.

If your business is:

  • Developing AI, cybersecurity, quantum, aerospace, or advanced manufacturing technologies
  • Already active in or looking to enter defence supply chains
  • Making significant capital investments in R&D equipment or manufacturing facilities
  • Scaling innovative technologies with both civilian and military applications

Now is the time to:

  1. Assess eligibility for both RDII funding and enhanced SR&ED credits under the new limits
  2. Evaluate how restored capital expenditure eligibility changes your R&D investment strategy
  3. Consider timing of major equipment purchases and facility investments to maximize benefits
  4. Prepare documentation for both RDII applications and SR&ED claims
  5. Explore coordination between multiple federal programs to optimize total funding

The implementation timeline provides a clear window: RDII applications are now open through regional development agencies (with some RDAs prioritizing applications showing immediate expenditure needs), while SR&ED's administrative improvements launch April 1, 2026.

The Bottom Line

Canada's $357.7 million Regional Defence Investment Initiative and the historic SR&ED enhancements from Budget 2025 aren't separate initiatives; they're complementary investments in a coordinated federal strategy to support innovative businesses, strengthen domestic capabilities, and build economic resilience.

For companies positioned to leverage both programs, the opportunity is substantial. The combination of zero-interest RDII loans, refundable SR&ED credits up to $2.1 million annually, restored capital expenditure eligibility, and streamlined administration creates a powerful foundation for scaling innovative businesses in Canada's defence and technology sectors.