Canada’s innovation ecosystem is picking up real speed. Just weeks after Budget 2025 introduced the most significant SR&ED program improvements in over a decade, the federal government unveiled a $357.7 million Regional Defence Investment Initiative (RDII) designed to strengthen the country’s defense supply chain and help Canadian businesses break into both domestic and international defense markets faster.

Together, these investments show a coordinated federal approach to supporting innovative businesses nationwide—whether they’re developing dual-use technologies, advancing R&D capabilities, or scaling manufacturing operations.

What Is the Regional Defence Investment Initiative?

Announced December 5, the RDII will be delivered by Canada’s seven Regional Development Agencies (RDAs) over three years, starting in 2025-26. The program targets small and medium-sized businesses already active in defense supply chains or looking to enter the sector—including those with dual-use products and services for both civilian and military markets.

RDII: Key Facts

  • Total Funding: $357.7 million distributed nationwide through RDAs, including FedDev Ontario ($94.7M + $106M reallocation), ACOA ($38.2M), and PrairiesCan ($48M+)
  • Funding Structure: Primarily zero-interest loans (repayable contributions) for eligible businesses
  • Timeline: April 2025 to March 2029 (3-year program, with a 4-year window to complete projects)
  • Eligible Activities:  
    • Digitization, automation, and technology integration to boost productivity
    • Market development and commercialization strategies
    • Obtaining certifications required for defense supply chain integration
    • Purchasing equipment and expanding or modernizing facilities
    • Development or adaptation of dual-use technologies

The RDII is designed to work hand-in-hand with the upcoming Defence Industrial Strategy (DIS), which will inject nearly $7 billion over five years to build Canada’s defense industrial base. Minister of AI and Digital Innovation Evan Solomon highlighted the game-changing nature of this investment: “This is real. This is not a new program. This is a new Canada.”

The Perfect Match: SR&ED Program Improvements from Budget 2025

The RDII isn’t a standalone measure—it’s part of a broader federal strategy that also includes major changes to Canada’s largest R&D tax incentive. Budget 2025, tabled November 4, brought historic SR&ED improvements that benefit many of the same innovative businesses targeted by the RDII.

Major SR&ED Improvements (for tax years starting on or after December 16, 2024):

Doubled Expenditure Limits

The enhanced 35% refundable credit expenditure limit has increased from $3 million to $6 million for eligible Canadian-Controlled Private Corporations (CCPCs). This means qualifying companies can now receive up to $2.1 million per year in refundable cash—double the previous maximum of $1.05 million.

Expanded Eligibility for 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 brings significant benefits to innovation-driven listed companies and their subsidiaries, who were previously limited to the 15% non-refundable credit.

Capital Expenditures Are Back

After years of being excluded, 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 defense, this is a game-changer.

Simplified Administration (starting April 1, 2026)

The Canada Revenue Agency will roll out major reforms, including:

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

Higher Phase-Out Thresholds

The taxable capital thresholds for the enhanced credit have increased from $10–50 million to $15–75 million, letting growing businesses keep access to higher refundable rates as they scale up.

Where Defense Innovation Meets R&D Tax Credits

The alignment between RDII and SR&ED creates powerful opportunities for Canadian businesses working at the crossroads of innovation and defense:

Dual-Use Technology Companies

Companies developing technologies for both civilian and military use—think AI, cybersecurity, quantum computing, advanced materials, sensors, robotics—can use RDII funding to speed up market entry, while SR&ED credits help offset ongoing R&D costs. The return of capital expenditure eligibility under SR&ED is especially valuable for businesses needing specialized equipment for both technology development and defense certification.A0

Manufacturing SectorA0

Budget 2025 made manufacturers the big winners, thanks to several complementary programs. A manufacturing company working on defense contracts could:A0

  • Access RDII funding (via zero-interest loans) for facility upgrades and defense certificationA0
  • Claim up to $2.1M in refundable SR&ED credits for eligible R&D expenses, including capital equipmentA0
  • Take advantage of immediate 100% expensing for manufacturing buildings acquired after November 4, 2025A0
  • This triple benefit significantly lowers the marginal effective tax rate and boosts cash flow for capital-intensive innovation projects.

Supply Chain Integration

The RDII is specifically designed to help businesses integrate into domestic and international defense supply chains faster. Companies following this strategy often need to invest in:A0

  • Specialized certifications and quality standards (AS9100, ISO 9001, ITAR compliance)A0
  • Production capabilities that meet defense specificationsA0
  • Security infrastructure and cybersecurity measuresA0

Many of these activities—especially technology development, process innovation, and experimental work to meet new specs—may qualify for SR&ED credits, while RDII can help fund the capital investments and market development needed to enter the supply chain.A0

Scaling Up R&DA0

Innovative companies often face challenges moving from R&D to commercialization, especially when entering highly regulated defense markets. The combination of RDII and SR&ED allows businesses to:A0

  • Use SR&ED credits to fund core R&D and technology developmentA0
  • Use RDII funding to support commercialization, market development, and infrastructure investments needed to bring your innovations to defense markets.
  • Maintain strong cash flow with refundable credits while strategically using zero-interest RDII loansA0

Strategic Timing: Canada’s Innovation Investment MomentA0

These parallel investments come at a pivotal time for Canadian innovation. With a growing focus on sovereign capabilities, defense readiness, and supply chain resilience, the federal government is building an ecosystem where businesses can tap into multiple forms of support:A0

Budget 2025’s Productivity Super-DeductionA0lowered Canada’s marginal effective tax rate to 13.2%—the lowest in the G7—through a suite of capital investment incentives that work alongside SR&ED.A0

The Strategic Response Fund offers extra support for Canadian businesses pursuing market diversification, retooling, and innovation-driven growth.A0

Clean Economy Investment Tax Credits continue to support businesses in critical mineral processing, clean tech manufacturing, and carbon capture technologies.A0

IP Support Programs like Elevate IP, the Patent Collective, and IRAP IP Assist help Canadian companies secure and leverage their intellectual property.A0

The RDII adds another key piece to this puzzle, focusing on defense and security sectors while embracing the dual-use innovation that defines today’s technology landscape.A0

What This Means for Canadian Businesses

If you’re at the crossroads of innovation, manufacturing, and defense, the message is clear: the federal government is making major, coordinated investments to support your growth.A0

If your business is:

  • Developing AI, cybersecurity, quantum, aerospace, or advanced manufacturing technologiesA0
  • Already active in, or looking to enter, defense supply chains
  • Making significant capital investments in R&D equipment or manufacturing facilities
  • Scaling innovative technologies for both civilian and military marketsA0

Now is the time to:A0

  1. Assess eligibility for both RDII funding and enhanced SR&ED credits under the new limitsA0
  2. Assess how the restored capital expenditure eligibility could impact your R&D investment strategy
  3. Plan the timing of major equipment purchases and facility investments to maximize benefitsA0
  4. Prepare documentation for both RDII applications and SR&ED claims
  5. Explore how to coordinate multiple federal programs to optimize total fundingA0

The implementation timeline is clear: RDII applications are now open through regional development agencies (with some agencies prioritizing applications that show immediate spending needs), while SR&ED administrative improvements will take effect on April 1, 2026.

Key Takeaways 

Canada’s $357.7 million Regional Defence Investment Initiative and the historic SR&ED enhancements from Budget 2025 aren’t separate programs—they’re coordinated investments as part of a unified federal strategy to help innovative businesses, strengthen domestic capabilities, and boost economic resilience.A0

If your company is positioned to take advantage of both programs, the potential is significant. With zero-interest RDII loans, refundable SR&ED credits of up to $2.1 million per year, renewed eligibility for capital expenditures, and simplified administration, you have a powerful springboard to scale your innovative business in Canada’s defense and technology sectors.A0