Canadian SMEs: How To Fully Benefit From The Industrial And Technological Benefits Policy

The Industrial and Technological Benefits (ITB) Policy requires companies awarded defence procurement contracts to undertake business activities in Canada equal to the value of the contracts they have won.¹ Its objective is to ensure that “significant investments in defence-related goods and services generate long-term and high-value economic benefit to Canadian industry and encourage the growth of industry in emerging technologies, established and globally competitive capabilities, and domestic capacity related to national security issues.”² Given the major supply contracts that have been or will be awarded under the Defence Industrial Strategy,³ this policy is expected to deliver tangible benefits to innovative Canadian small and medium sized enterprises (SMEs), including investments, technology transfer and various forms of strategic partnerships.

The ITB Policy - a contractual commitment for major contractors

The ITB Policy applies to all defence and Canadian Coast Guard procurements valued at more than CA$100 million that are not subject to international trade agreements, or where the national security exception (NSE) is invoked.

ITB requirements are defined by Innovation, Science and Economic Development Canada (ISED) and vary depending on the specific procurement. Bidders on targeted contracts must submit a value proposition, which is evaluated and weighted as part of the overall bid assessment alongside price and technical compliance. This value proposition typically accounts for at least 10% of the total evaluation score.

A bidder’s value proposition may include both direct and indirect commitments. Direct commitments relate specifically to the equipment or services being procured by Canada; indirect commitments relate to the bidder’s broader products or business activities and are not directly tied to the procured goods or services. At the time of submission, bidders must generally identify specific transactions representing at least 30% of the bid value. They must also commit to undertaking business activities in designated regions and with Canadian SMEs. To qualify, a transaction must be causally linked to the ITB obligation, meaning it would not have occurred in the absence of the requirement.⁴ Eligible transactions completed prior to bid submission may be “banked” under certain conditions, provided they do not exceed 50% of the required Canadian content value.

Value propositions are assessed based on alignment with the 17 Key Industrial Capabilities (KICs), as well as their contribution to five strategic pillars:

• C1 - Canadian defence industry work;
• C2 - Canadian supply chain development;
• C3 - Canadian research and development (R&D);
• C4 - Canadian exports; and
• C5 - Skills and training development.

The weighting of these pillars varies depending on the nature of the procurement. Accordingly, procurements that include Canadian content elements in emerging technologies (such as artificial intelligence, clean technologies and autonomous systems) tend to place greater emphasis on research and development in Canada (Pillar C3) and on the development of Canadian supply sources (Pillar C2). Conversely, procurement aligned with KICs in core and essential industrial sectors (such as aerospace systems and components) typically assigns greater weight to work performed within the Canadian defence industry (Pillar C1).

Once a bidder is selected, the value proposition including all targeted commitments and transactions becomes a binding contractual obligation of the supplier. The supplier is required to submit annual reports to the ITB Authority. These obligations may be adjusted over the term of the contract, for example where the contract value changes or where transactions generate more credits than originally anticipated. Contractors must retain all records and supporting documentation relating to transactions until at least the second anniversary of the final payment, and such documentation must remain available for audit and verification purposes.

In the event of non-compliance with ITB obligations, the contracting authority may apply a range of contractual remedies, including withholding of payments, liquidated damages, contract termination, drawing on performance security (such as a letter of credit), or adjustments to performance incentives. The combined financial impact of these remedies cannot exceed 10% of the total contract value, which may significantly affect the profitability of the contract.

Benefits of transactions with Canadian SMEs

Credits granted under the ITB Policy vary depending on the type of transaction. Transactions involving SMEs benefit from enhanced treatment at several levels:

• The first million dollars of the value of a transaction involving the purchase of products or services from an SME is credited at 100% of Canadian value credit (CVC), provided that the CVC of the products or services is at least 70%.
• For long-term innovation contributions made directly to qualifying SMEs, credits are multiplied by a factor ranging from four to nine.
• Transactions with venture capital funds aimed at supporting SME growth benefit from a credit multiplier of five.

For the purposes of the ITB Policy, a SME is defined as a Canadian company with fewer than 250 full-time employees at the time the transaction is entered into. Agents or distributors of foreign goods and services, as well as subsidiaries of the prime contractor, are not considered SMEs.

How Canadian SMEs can benefit from the ITB Policy

Canadian companies with relevant technologies and industrial capabilities have a significant strategic opportunity to engage with large prime contractors subject to ITB obligations. To benefit from this framework, SMEs should remain informed about ongoing procurements and existing ITB commitments and understand how their activities may contribute to CVC requirements. They may also gain access to equity investment opportunities through venture capital funds linked to ITB commitments. At the time of publishing this insight, there are CA$23.4 billion in unidentified ITV obligations yet to be fulfilled, and CA$20.3 billion in ITB commitments identified as “in progress.” The breakdown of completed and outstanding ITB obligations can be obtained and can provide useful information about potential business partners who may be actively looking for ITB-compliant investment opportunities.

However, this approach must be supported by a proactive business development strategy and the implementation of compliance programs tailored to the defence sector (e.g., controlled goods compliance, cybersecurity requirements, ISO standards such as ISO 9001). Although the ITB Policy does not replace the need for competitiveness in terms of price, quality and delivery performance, it provides a meaningful competitive advantage that Canadian SMEs should actively seek to leverage.

To learn more about the ITB Policy and how to frame your offering as ITB creditable or maximise your credits or to obtain assistance with structuring your contractual arrangements, investments, or compliance programs please contact Dentons Canada or the authors of this publication, Dominique Babin and Paul M. Lalonde.

The authors would like to thank Diana Nakka for her contributions to this insight.

This article is part of our Financing Defence in Canada series. To read the previous article in the series, click here.

Footnotes

1. See: https://ised-isde.canada.ca/site/industrial-technological-benefits/en↩

2. See the ITB – Model Terms and Conditions, available at https://ised-isde.canada.ca/site/industrial-technological-benefits/en/itb-toolkit/model-terms-and-conditions↩

3. See: https://www.canada.ca/en/department-national-defence/corporate/reports-publications/industrial-strategy/security-sovereignty-prosperity.html↩

4. See the Causality Guidelines , available at https://ised-isde.canada.ca/site/industrial-technological-benefits/en/key-references/causality-guidelines↩