Canada’s Defence Spending Surge Highlights Critical IP Ownership Challenges for SMEs

Canada’s federal government has committed to a sweeping Defence Industrial Strategy that anticipates approximately $180 billion in direct defence procurement investment and $290 billion in defence-related infrastructure spending by 2035. This ambitious plan underscores the country’s intent to bolster its defence sector significantly over the coming decade and beyond.

Yet, a critical challenge shadows this surge: 92 percent of Canada’s defence sector companies are small and medium-sized enterprises (SMEs) that often lack the necessary intellectual property (IP) expertise to navigate the evolving landscape. David Turgeon, an intellectual property and patent lawyer at Fasken Martineau DuMoulin LLP in Montreal, highlights that many of these companies are not sufficiently familiar with IP to conduct business effectively in the next five years.

This knowledge gap lies at the heart of two major shifts in Canadian federal policy: a concerted effort to ensure Canadian innovation remains owned, controlled, and commercialized domestically, and a dramatic increase in defence spending. These shifts respond to longstanding concerns about Canadian innovation retention, which predate the current government’s spending plans but have now intensified in scale.

Kevin Shipley, a patent and IP lawyer at Marks & Clerk in Ottawa, describes a recurring cycle where Canadian companies develop technology domestically but lose ownership when seeking capital. Historically, Scientific Research and Experimental Development (SR&ED) tax credits covered only research and development costs, excluding IP-related expenses such as patent filings and legal counsel. As companies grew, foreign capital became their only viable funding source, often accompanied by conditions that transferred control, ownership, or led to acquisition, resulting in patent value flowing to foreign owners.

Cultural factors also play a role. Shipley notes that US founders typically prioritize early patent filings, recognizing the value sophisticated investors place on IP-heavy portfolios. In contrast, Canadian founders often build companies to operate long-term rather than to exit, a valid approach but one that deprioritizes IP protection when it is most critical.

In response, the Canadian government has launched dedicated IP funding programs unprecedented in scope. Shipley calls this a “cautiously optimistic win,” highlighting initiatives such as ElevateIP at the federal level, IP Ontario provincially, and IP Assist through the Natural Sciences and Engineering Research Council of Canada (NSERC). These programs provide non-dilutive funding—meaning companies do not surrender equity or control—and payments are made directly to service providers, avoiding long reimbursement waits common in past programs.

Sector-specific incentives complement these efforts. For example, Mitacs has introduced a new Accelerate funding call in partnership with Canada’s Department of National Defence to support collaborations between defence and security companies and academic institutions. Funding for critical minerals prioritizes domestic processing to produce battery-grade materials within Canada rather than exporting raw ore.

Defence and space initiatives emphasize dual-use development—technologies serving both civilian and defence markets—because defence procurement alone cannot sustain companies. Shipley explains that civilian markets help underpin defence economics and broaden the investor base, as large institutional funds often avoid purely defence companies but invest in dual-use businesses. Thus, cultivating a civilian-facing patent portfolio serves both legal protection and financing strategies.

However, ambiguity persists in defence procurement policies. Turgeon points out that while Canada’s Defence Industrial Policy articulates broad intentions regarding IP ownership and sovereignty, key terms like “Canadian-owned IP” and “Canadian-based invention” lack precise definitions. This uncertainty complicates practical application.

A central issue is the distinction between background IP—technology existing before a specific research and development project—and foreground IP—new inventions resulting from that project. Using a drone example, Turgeon explains that adding artificial vision to an existing drone creates foreground IP, but the drone itself remains background IP. Both are essential to operate the system, yet government rights to background IP remain unclear. Additionally, companies must verify chain of title, as background IP developed with foreign grants, such as from the United States, may entail retained rights by those governments.

Given these complexities, Turgeon advises many SMEs to prioritize trade secret protection where feasible. He recommends maintaining secrecy until an informed decision is made to pursue patenting or public disclosure, cautioning that once disclosed, options become irrevocably limited.

Emerging technologies like artificial intelligence and autonomous systems introduce further challenges. Canada’s Commissioner of Patents has stated that a physical person must be the inventor for a patent to be valid, a position yet untested in court. For defence clients employing AI tools, Turgeon suggests ensuring human involvement at every stage and that involved personnel be Canadian-based and employed domestically, safeguarding Canadian IP ownership as legal frameworks evolve.

Internationally, Canada’s participation in the Security Action for Europe (SAFE) agreement is reshaping defence IP negotiations. Historically dominated by US dynamics, these discussions now increasingly involve European partners who hold extensive global patent portfolios and favor collaborative licensing approaches. Turgeon contrasts this with US negotiations, which he describes as “a game of power” where companies often must assign IP rights to enter supply chains. The shift toward European partnerships may enable more balanced IP arrangements, but only for companies that fully understand their contractual commitments.

As Canada’s defence spending escalates, the intersection of IP strategy and procurement policy will remain a critical area for SMEs and legal advisors alike. Navigating this evolving environment requires careful IP management, strategic use of government funding, and vigilance in contract negotiations to preserve Canadian innovation and sovereignty.