Canada has fundamentally shifted its posture on defence. What was once treated as a procurement function (a slow, bureaucratic necessity) is now positioned as a pillar of national industrial strategy, economic sovereignty, and allied export capacity.
For innovative businesses in the defence and aerospace sector, the implications are significant. A new $6.6 billion Defence Industrial Strategy (DIS), a newly created Defence Investment Agency (DIA), and a suite of complementary funding programs have created one of the most generous innovation funding environments in Canada's history. And critically, these new programs are designed to stack alongside Canada's existing flagship R&D incentive (SR&ED) not replace it.
Here's what you need to know.
What Is Canada's Defence Industrial Strategy?
In February 2026, Canada formally announced its Defence Industrial Strategy, a multi-year national strategy backed by $6.6 billion allocated in the 2025 federal budget to encourage Canadian industry to produce equipment used by the military. The broader defence commitment behind it is substantial: Initial investments under the DIS contribute to Canada spending 2% of GDP on defence in 2025–2026, putting Canada on a pathway to meet NATO's new Defence Investment Pledge of 5% of GDP by 2035.
The DIS is not a single grant program, but a coordinated industrial development framework. It represents a coordinated, multi-billion-dollar shift in capital deployment, innovation programming, export promotion, and sovereign capability building.
The strategy's stated priorities cover a broad range of technology sectors. Priority investment areas include aerospace platforms, avionics, and aircraft communications; ammunition; digital systems including AI, quantum computing, and secure cloud; sensors; space-based intelligence and satellite communications; specialized manufacturing including land vehicles and surface ships; training and simulation; and uncrewed and autonomous systems spanning land, air, sea, and space.
The Defence Investment Agency: Centralizing and Accelerating Procurement
A key structural element of the new strategy is the Defence Investment Agency (DIA), established in October 2025. The DIA is a new Special Operating Agency within Public Services and Procurement Canada, created to accelerate and modernize defence procurement. Its mission is to deliver equipment, technology, and capabilities to the Canadian Armed Forces and the Canadian Coast Guard more quickly and efficiently, while growing Canada's domestic industrial base through strategic partnerships, targeted investments, and active engagement with Canadian industry.
The DIA will foster collaboration with industry and international partners, support innovation, and ensure the CAF has timely access to modern equipment and technology.
For defence and aerospace suppliers, the significance of the DIA is practical: It represents a single point of contact for procurement relationships, replacing a fragmented and notoriously slow system that had long been a barrier to business. The Canadian defence industry contributes nearly $10 billion to Canada's GDP and supports over 81,000 jobs. The DIA is designed to grow both numbers by making it easier for Canadian companies to win contracts and integrate into defence supply chains.
The DIS Funding Architecture: Four Streams to Know
The DIS includes four broadly described funding and support streams: direct funding for innovation, prototyping, and demonstration; capitalization through loans and venture capital for industrialization and scale-up; public procurement and investments providing commercial traction and references; and Industrial and Technological Benefits — mandatory reinvestments that can fund enabling projects spanning capacity, innovation, and skills development.
Within these streams, several specific programs are already active or imminent:
Regional Defence Investment Initiative (RDII): Resources are available through the Regional Defence Investment Initiative and IRAP's Defence Industry Assist program ($357.7 million), as well as the Strategic Response Fund, Business Development Canada, BOREALIS, the Drone Innovation Hub, and other sources. The RDII is specifically designed to help SMEs integrate into domestic and international defence supply chains.
Defence Industry Assist (DI Assist): DI Assist is a new stream under the NRC's Industrial Research Assistance Program, supporting Canadian businesses developing dual-use technology. Dual-use technology — innovations with both commercial and military applications — is a central emphasis of the DIS, making a wider range of companies eligible than many would expect.
BDC Defence Platform: A $4 billion Defence Platform at the Business Development Bank of Canada has been established as a new capital vehicle to ensure Canadian companies, including SMEs, have access to growth financing tied to defence and dual-use innovation.
Drone Innovation Hub and NRC Investment: $105 million over three years has been allocated for a Drone Innovation Hub at the National Research Council of Canada, plus $459 million over five years to develop an aircraft research and demonstration platform supporting Canada's defence industries.
BOREALIS: The Bureau of Research, Engineering and Advanced Leadership in Innovation and Science (BOREALIS) is a new body created to coordinate and accelerate defence research and frontier technology development.
How SR&ED Fits Into the DIS Picture
Here is what distinguishes Canada's approach from a simple spending program: Defence funding is often layered on top of broader innovation supports, not separate from them.
SR&ED (Canada's Scientific Research and Experimental Development program) remains the country's flagship R&D tax incentive, and it is fully compatible with DIS-aligned activities. In fact, recent enhancements to SR&ED have made it more valuable for exactly the kinds of capital-intensive, technology-intensive work that defence and aerospace companies perform.
What changed with SR&ED in 2026:
- The enhanced 35% refundable credit expenditure limit for eligible Canadian-Controlled Private Corporations (CCPCs) doubled from $3 million to $6 million, enabling up to $2.1 million in annual refundable credits
- Capital expenditures (that is, equipment, machinery, and facilities used directly in R&D) were reinstated as eligible, reversing a years-long exclusion. For capital-intensive sectors like aerospace manufacturing, this is particularly valuable
- Taxable capital thresholds for the enhanced credit increased from the $10–50 million range to $15–75 million, allowing growing companies to retain access to higher refundable rates as they scale
For defence and aerospace companies, the reinstated capital equipment eligibility is especially meaningful. Investments in specialized testing rigs, manufacturing equipment, simulation hardware, and facility modifications made in direct support of R&D, which are all now eligible, were previously excluded.
With recent SR&ED enhancements, including the increased expenditure limit and the reinstatement of capital expenditure eligibility, contractors can significantly offset the high costs of R&D in areas such as drones and quantum technologies. For Tier 2 and Tier 3 suppliers, SR&ED is a critical financial instrument to offset the high cost of meeting the rigorous tolerances and material requirements demanded by prime contractors.
How DIS Programs and SR&ED Stack Together
The DIS and SR&ED are complementary, not competing. Companies can (and should) pursue both simultaneously, with a few structural considerations in mind.
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.
A practical framework for how the programs interact:
DIS funding covers what SR&ED doesn't, and vice versa. SR&ED is a retrospective tax credit on qualified R&D expenditures. DIS programs like RDII and DI Assist provide prospective grants and loans for supply chain integration, prototyping, and commercialization. The two funding mechanisms target different phases of the innovation cycle and different cost categories.
Government assistance reductions apply, so plan accordingly. When a company receives a DIS grant that directly reduces the cost of SR&ED-eligible expenditures, the grant amount will reduce the SR&ED expenditure base. This is standard government assistance treatment under the SR&ED program. Careful project structuring and claim planning can minimize overlap and preserve the maximum SR&ED credit base.
Capital investments may serve both programs. Equipment purchases made to advance R&D capability can now qualify for SR&ED credits (with the reinstated capital equipment eligibility), while RDII and other DIS programs may separately fund facility upgrades or production capacity expansion tied to defence supply chain integration. These are different cost pools, but thoughtful planning ensures neither is left unclaimed.
Dual-use activities are explicitly within scope for DIS, and frequently qualify for SR&ED. The federal strategy is explicitly designed to support commercialization that strengthens national security outcomes, even when defence is not your primary market. If your company is developing AI, autonomous systems, quantum sensors, advanced materials, or cybersecurity capabilities for commercial markets, there is a strong chance those activities also qualify under both DIS and SR&ED.
Who Should Be Paying Attention
The DIS is broader in scope than many companies initially assume. Canadian defence and aerospace companies, as well as businesses interested in diversifying and supporting this sector, should consider whether they may benefit from new financial support.
Priority sectors include:
- Aerospace platform developers and avionics companies
- Uncrewed and autonomous systems (drones, AUVs, UGVs)
- AI, quantum computing, and digital systems companies
- Shipbuilding and marine technology
- Advanced manufacturing and specialized production
- Sensors, electronic warfare, and space technology
- Training and simulation technology
- Cybersecurity and high-assurance communications
Technical challenges you face daily (such as custom automation, composite iterations, or scaling prototype designs) often qualify for significant cash recovery, even if they aren't labeled "R&D." The same logic applies across the DIS: companies that view themselves as technology or manufacturing businesses, not "defence companies," may already be doing work that qualifies for both streams.
Key Timelines and Actions
The DIS is still rolling out, with programs coming online in stages through 2026 and beyond. Key near-term milestones:
- RDII applications: Open now through regional development agencies; some RDAs are prioritizing applications demonstrating immediate expenditure readiness (NOTE: RDII application deadlines and regional program details vary by province and RDA.)
- SR&ED 2026 enhancements: In effect for taxation years beginning on or after December 16, 2024
- DIS full program rollout: The multi-year strategy will see additional programs and application windows announced through 2026 and into 2027
Why Boast for Defence and Aerospace SR&ED
Boast has helped more than 2,000 companies across Canada and the United States claim over $900 million in R&D tax credits. For defence and aerospace companies navigating the DIS landscape, the SR&ED component of a broader funding strategy isn't a form-filling exercise; it's a material revenue line that demands specialized expertise.
The complexity of defence R&D claims is exactly where generalist accounting firms and automated tools fall short. Qualifying activities are often embedded in engineering and manufacturing work that isn't formally labeled as "research." Documentation requirements for CRA technical review are rigorous. And with the reinstated capital equipment eligibility, there are new claim opportunities that require careful integration with project accounting.
Boast's hybrid technology + human expertise model is built for this. Our platform automates data collection and documentation, while our team of SR&ED specialists ensures every qualifying activity is identified, properly described, and defensible under CRA review, backed by our 100% audit defense commitment.
Ready to build your defence innovation funding strategy? Talk to a Boast SR&ED specialist to assess your SR&ED eligibility alongside any DIS programs you're pursuing.
