Arithmetic of the Canadian Rearmament

2026-06-09

Canada is about to spend more on defense than at any time since the early Cold War. The bet is that guns can also be an industrial policy. The arithmetic, and the politics, are less obliging.

For most of the past three decades, Canada treated its armed forces the way a homeowner treats the furnace: noticed only when it failed. Defense spending sagged to roughly 1% of GDP by 2014, half of what membership in NATO was supposed to require, and successive governments in Ottawa found the geography of three oceans and a friendly superpower to the south a cheaper form of insurance than tanks. That era is over. In the space of a single year Canada has gone from laggard to convert, vowing to lift military outlays to 5% of GDP by 2035 and pouring more than C$63bn into defense in the 2025-26 fiscal year, the largest annual increase in generations. Prime Minister Mark Carney, a central banker by trade, calls it “a complete game changer.” It is also, quietly, the most ambitious industrial gamble the country has attempted since the National Energy Program.

The trigger was less Vladimir Putin than Donald Trump. Carney took office in March 2025 amid a trade war with Washington, tariffs on Canadian goods, and the American president musing about annexation and a “51st state.” A country that had outsourced its security to the United States suddenly discovered that its principal supplier of weapons was also its principal antagonist. The strategic response, embodied in the Defence Industrial Strategy unveiled in February 2026, is captured in three words: build, partner, buy. Build at home where Canada can; partner with allies other than America where it must; and buy off the shelf only when doing so still feeds Canadian industry. Sovereignty, not value for money, is now the organizing principle. Whether that principle survives contact with the federal balance sheet is the question that hangs over everything that follows.

The arithmetic of 5%

Start with the numbers, because they are daunting. At The Hague summit in June 2025, NATO members agreed to spend 5% of GDP on defense by 2035, split into 3.5% for core military needs and 1.5% for related infrastructure, cybersecurity and resilience. For Canada that translates to something close to C$150bn a year, against the roughly C$41bn NATO counted in 2024, when the country ranked 27th of 31 members. Per-capita spending, by TD’s reckoning, climbs from about C$763 before the turn toward roughly C$1,263 in 2026, edging Canada toward the Finnish league.

The country did clear the old 2% bar in the 2025-26 fiscal year, a milestone it had dodged since the 1980s, helped by an emergency injection of around C$9bn. Getting to 3.5% in core spending is a different order of climb. The Parliamentary Budget Officer estimates it will require roughly C$33.5bn in additional cash outlays a year over the next decade, and will widen the federal deficit by some C$63bn, about 1.4 percentage points of GDP, by 2035-36, lifting the debt-to-GDP ratio by more than six points. The near-term picture is already deteriorating: the PBO projects a deficit of around C$72bn for 2025-26, double the previous year’s, and warns that the debt ratio is no longer on a declining path. The CD Howe Institute, a respected think-tank, has urged Ottawa to publish a “credible fiscal plan” before the bills arrive. So far it has not.

The deeper economic argument is about multipliers, the ripple a dollar of spending sends through the economy. Here the news for boosters is mixed. RBC’s economists note that defense services carry a multiplier modestly above the economy-wide average, but capital equipment, much of it imported, carries one of the lowest, precisely because the money leaks abroad. That is the intellectual case for building at home: keep the dollars circulating in Quebec and Ontario rather than Texas or Bavaria. Critics counter, with some justice, that the multiplier on howitzers still pales beside that of health care, education or housing, all of which will compete for the same fiscal oxygen. Mr Carney himself concedes the “trade-offs” arrive “towards the end of the decade,” and that he will need “social licence” to make them. For now he has it: support for the 5% target has roughly doubled in a year, to about 72% in one recent poll. Public enthusiasm, like a defense budget, is easier to raise than to sustain.

Build, partner, buy

The Defence Industrial Strategy is where ambition meets machinery. Its centerpiece is the Defence Investment Agency, a stand-alone procurement body created in October 2025 and meant to sidestep the molasses of Canada’s traditional acquisition process, long described as the country’s “Achilles heel.” The strategy names ten “sovereign capability” areas, from munitions to uncrewed and autonomous systems, in which Ottawa intends to favor domestic producers. It promises to anoint a handful of Canadian firms as “strategic partners,” to publish a critical-minerals strategy, and to stand up new financing vehicles: a C$4bn Defence Platform at the Business Development Bank of Canada aimed at smaller firms, a Canadian Defence Industry Resilience program for production capacity, and a research bureau with the acronym BOREALIS.

The advertised payoff is large. By 2035 the government hopes to create 125,000 jobs, raise defense exports by 50%, and lift the share of acquisitions going to Canadian firms by 70%. Over the decade it envisions C$180bn in procurement and C$290bn in defense-related infrastructure, yielding upward of C$125bn in claimed economic benefits. Canada’s pitch rests on a genuine comparative advantage: it produces ten of the twelve raw materials NATO deems defense-critical and sits on the world’s largest deposits of high-grade uranium. The country also joined the European Union’s SAFE program in February 2026, buying a seat at a roughly €150bn joint-procurement table and signaling, unmistakably, a pivot across the Atlantic.

The skeptics’ refrain is that strategies are cheap and contracts are dear. Christyn Cianfarani, who heads the main industry association, has noted that the document is light on dates, and that bidders have grown weary of competitions whose winners are foregone conclusions. The proof will be in the steel actually cut. Conveniently, a great deal of steel is about to be cut.

The jets that will not be chosen

No file better captures Canada’s new posture, or its new awkwardness, than the fighter fleet. In January 2023 the Trudeau government signed a C$19bn deal for 88 Lockheed Martin F-35As, with the full program cost since estimated nearer C$27bn to C$30bn. Within a day of taking office Mr Carney ordered a review. More than a year later it has become perhaps the longest-running procurement review in living memory, with no firm deadline; a September 2025 target came and went.

The mechanics are revealing. Canada has committed to and largely paid for the first 16 jets, due by the end of 2026, and is keeping up payments to hold its place in the production queue. The contested portion is the remaining 72. Into that gap has stepped Sweden’s Saab, whose Gripen E offers something the F-35 structurally cannot: assembly on Canadian soil, full technology transfer, access to source code, sovereign control of mission data, and an independent upgrade path. Saab claims the package would support some 12,600 domestic jobs and suits Arctic operations. The emotional logic of sovereignty runs entirely in the Gripen’s favor.

The operational logic does not. Internal evaluation data leaked to Radio-Canada in late 2025 showed the F-35 outscoring the Gripen by 95% to 33% across capability categories, and defense-ministry officials reportedly argued internally for the full F-35 buy. Washington has applied unsubtle pressure: the US ambassador warned that walking away could jeopardize the NORAD partnership, and analysts speak of an American “red card” over the Gripen, since the jet’s American components could in theory be blocked. By mid-2026 the likeliest outcome looked like a split fleet, somewhere between a modest top-up of Gripens and a full mixed force of roughly 30 to 60 F-35s alongside up to 72 Gripens. Sweden, meanwhile, has already won a related prize: in May 2026 Canada entered talks for five or six Saab GlobalEye early-warning aircraft worth more than C$5bn, beating Boeing’s E-7 and an L3Harris bid, with some 3,000 jobs attached. The direction of travel is European, and it is being navigated jet by jet.

Under the sea

If the jets reveal Canada’s discomfort with America, the submarines reveal its courtship of everyone else. The Canadian Patrol Submarine Project aims to buy up to 12 diesel-electric boats to replace the geriatric Victoria class, of which only one is reliably operational. The acquisition is worth more than C$20bn, and perhaps C$60bn over the fleet’s life, making it the largest defense purchase in decades. Two finalists were named in August 2025: South Korea’s Hanwha Ocean, partnered with HD Hyundai and offering its KSS-III boat, and Germany’s ThyssenKrupp Marine Systems, offering the Type 212CD. Mr Carney toured shipyards in both countries.

The bidding has become a festival of inducement. Hanwha promises four boats by 2035, the first in 2032, and dangles a whole-of-government Korean package: a claimed C$94bn in GDP and more than 22,500 jobs a year through 2044, a defense-vehicle joint venture with Canada’s auto-parts association branded “Project Arrow,” a US$250m investment in Algoma Steel, and 30,000 jobs, all contingent on winning. TKMS, backed by a personal delivery guarantee from Germany’s defense minister at the CANSEC expo, counters with four boats by 2036, around C$86bn in GDP and 650,000 job-years, plus a sustainment partnership with Seaspan on the west coast. Neither set of figures is independently verified; both flow from models commissioned by the bidders. A decision is expected before the end of June 2026, though a binding contract is not anticipated until roughly 2028, with first delivery by 2035. One option floated in Ottawa is to split the order six and six, deploying German boats in the Atlantic and Korean boats in the Pacific, a solution that would please diplomats and horrify logisticians.

Ice and steel

The Arctic is where Canada’s sovereignty anxieties are most literal, and its industrial story most flattering. Under the National Shipbuilding Strategy the country is building two heavy polar icebreakers, among the most capable conventional designs in the world. Seaspan’s Vancouver yard holds a contract worth about C$4.27bn to build one entirely in Canada, a 158-meter vessel employing more than 1,000 shipbuilders and a supply chain of over 800 firms; its first major hull block is complete and delivery is targeted for 2030. Davie, the Quebec yard at Lévis, holds a roughly C$3.25bn contract for the second, the Polar Max, to be named CCGS Arpatuuq, built jointly with the Helsinki Shipyard that Davie shrewdly acquired from its Russian owner in 2023. Steel was cut in Finland in August 2025 and Canadian production began in March 2026.

The strategic kicker is the ICE Pact, a trilateral arrangement with the United States and Finland. America announced in October 2025 that it would renew its icebreaker fleet with Canadian and Finnish help, and its Coast Guard selected two designs for its Arctic Security Cutter program: a Seaspan and Aker Arctic design for six ships, and a Davie and Helsinki design for five. In other words, the same yards now serving Canadian sovereignty are positioned to export to the very American ally Canada is otherwise hedging against. It is the rare file on which “build at home” and “sell abroad” point the same direction.

Powder and shells

Modern war, Ukraine has taught, is decided as much by ammunition as by platforms, and here Canada was nakedly exposed, lacking even domestic production of nitrocellulose, the propellant base. The Defence Industrial Strategy moves to fix that. In March 2026 Ottawa committed C$1.4bn under its resilience program to artillery production. IMT Precision of Ingersoll, Ontario receives up to C$305m to make bodies for 155mm shells, creating up to 400 jobs at full tilt. General Dynamics Ordnance and Tactical Systems in Quebec receives a larger tranche: C$355.7m for a nitrocellulose plant at Valleyfield, C$57.9m for charge assembly, and C$642m for a 155mm high-explosive projectile facility at Le Gardeur. The same parent’s London, Ontario operation, General Dynamics Land Systems-Canada, remains the country’s armored-vehicle champion. The munitions push is the purest expression of the new doctrine: unglamorous, domestically rooted, and aimed squarely at the kind of supply-chain vulnerability that geography no longer excuses.

The banker’s bank

Mr Carney’s most personal contribution is financial. Canada has been selected to host the headquarters of the Defence, Security and Resilience Bank, originally and tellingly nicknamed “the NATO bank.” Conceived in 2025 by Rob Murray, a veteran of NATO’s innovation arm, and negotiated among 18 countries in Montreal, the institution is designed as a AAA-rated multilateral lender that would let allied governments borrow cheaply for defense, mobilize private capital at scale, and steer financing toward the small and medium firms that conventional banks shun as reputationally awkward. Backers hope it can marshal up to US$135bn. Canada’s lead negotiator is the head of the Business Development Bank, and BMO has signed on as a partner bank alongside heavyweights such as JPMorgan and Deutsche Bank. For a former Bank of Canada and Bank of England governor, landing the headquarters, with its hundreds of finance and analytical jobs likely in Montreal or Toronto, is both a policy win and a signature.

Winners

The reshaping of Canadian defense creates clear beneficiaries. In rough order of how concentrated the gains are:

1. Quebec and British Columbia shipbuilding. Davie (Lévis) and Seaspan (Vancouver) anchor the icebreaker program and have export upside through the ICE Pact, plus a submarine-sustainment role for Seaspan if TKMS wins.
2. Saab. Even a partial Gripen order plus the GlobalEye deal makes Sweden the standout foreign winner of Canada’s pivot away from American hardware.
3. The eventual submarine champion. Either Hanwha Ocean and HD Hyundai of Korea, or Germany’s TKMS, secures a multi-decade, C$60bn relationship. Algoma Steel is a contingent winner if Hanwha prevails.
4. Domestic munitions and land systems. General Dynamics’ Canadian operations in Quebec and Ontario, and IMT Precision, gain from the artillery and propellant build-out.
5. Montreal and Toronto finance. The Defence, Security and Resilience Bank brings a new multilateral institution, and BMO an early seat at the table.
6. Critical-minerals and uranium producers. Canada’s raw-material advantage, including uranium giant Cameco, fits the resilience agenda.
7. Smaller domestic firms. The BDC Defence Platform and resilience grants are designed precisely to pull them into the supply chain.
8. Finnish shipbuilding. Helsinki Shipyard and Aker Arctic ride Canadian and American icebreaker demand.

Losers

1. Lockheed Martin and American primes. A trimmed F-35 order is the most visible casualty of the sovereignty turn; Boeing (which lost the early-warning contest) and L3Harris also lost ground.
2. The US-Canada defense relationship. NORAD friction and the loss of a captive customer are strategic costs that may yet bite.
3. The federal balance sheet. A deficit near C$72bn and a debt ratio no longer falling are the price of admission, before the 3.5% climb even begins in earnest.
4. Social-spending priorities. Defense carries a weaker economic multiplier than health, education or infrastructure, all of which face the same fiscal squeeze.
5. The losing submarine bidder, and the broader risk that a politically driven split order produces a logistically incoherent two-class fleet.
6. Taxpayers, if procurement reverts to its historic habit of delay and cost overrun despite the new agency.

Where the money might flow

A necessary caveat first: this is general information, not personalized investment advice, and the author is not a licensed financial advisor. Defense equities carry distinctive risks here. Contract outcomes are often binary and politically driven, the F-35 saga shows how a single review can stall a program for years, valuations in the sector are elevated (the small Canadian aerospace and defense cohort recently traded around 34 times earnings after a roughly 25% twelve-month run), and several of the relevant names are thinly traded small caps. With that framing, the publicly listed companies most exposed to Canada’s rearmament include:

• CAE (TSX:CAE). A global leader in military simulation and training, with a backlog reported near C$19.5bn and recurring revenue that makes it the sector’s most defensive holding, though it trades at a premium.
• Bombardier (TSX:BBD). Best known for business jets, but its defense unit supplies special-mission aircraft; the stock has run hard, which cuts both ways.
• MDA Space (TSX:MDA). Space and robotics, with a backlog around C$4bn and exposure to the satellite and surveillance side of the strategy, but a volatile share price.
• Magellan Aerospace (TSX:MAL). A components maker that has surged on long-term agreements with Pratt & Whitney Canada; a small cap with the attendant swings.
• Heroux-Devtek (TSX:HRX). A landing-gear specialist leveraged to global aircraft demand.
• Calian Group (TSX:CGY). A services and training firm with a roughly C$1.4bn backlog and defense tailwinds.
• Exchange Income Corp (TSX:EIF). A diversified holder with aerospace and special-mission exposure.

The uncomfortable truth for patriotic investors is that Canada offers thin pure-play exposure to its own boom. Much of the spending will accrue to foreign winners: Saab in Stockholm, Hanwha and HD Hyundai in Seoul, ThyssenKrupp in Essen, and, for the irreducible core of the fighter fleet, Lockheed Martin in Bethesda. A diversified position in European and Korean defense names, or in a defense-focused exchange-traded fund, may capture more of the story than the TSX alone. As ever, the prudent course is to weigh time horizon, risk tolerance and the real possibility that a program is delayed or cancelled outright, and to consult a licensed advisor before acting.

The wager

Strip away the announcements and Canada is making a single, large bet: that a generational surge in military spending can double as industrial policy, rebuilding shipyards, munitions lines and aerospace supply chains while buying sovereignty from an unreliable neighbor. The logic is coherent and the political moment is rare. But the gap between a strategy and a delivered submarine is measured in years, the deficit is widening before the hardest spending arrives, and the country’s procurement machinery has disappointed before. Mr Carney’s wager is that this time, with a banker in charge and a continent rearming, the furnace gets fixed before the next cold snap. The bills, as he admits, come due toward the end of the decade. So will the verdict.