In March 2026, Canada achieved a historic milestone by crossing the North Atlantic Treaty Organization (NATO) defence spending benchmark of 2% of Gross Domestic Product (GDP), surpassing C$63 billion in expenditures. Prime Minister Mark Carney announced the milestone as proof of Canada’s commitment to collective security. Yet the goalposts have already moved: NATO’s new Defence Investment Pledge requires member states to reach 5% of GDP on defence expenditure by 2035, a target that would require Canada to spend roughly C$150 billion annually. Against that background, the Canada Strong Fund (CSF), described by the government as a sovereign wealth fund (SWF), was announced: seeded by C$25 billion disbursed over three consecutive years with the stated intent of making equity investments in sectors such as advanced manufacturing, energy and mining. The CSF may have genuine potential to serve as a NATO defence asset through its capacity to accelerate domestic critical mineral production. Yet its principally debt-financed structure, at a moment when federal debt-servicing costs are consuming an increasingly large share of the federal budget, raises a question: does this particular approach to building economic sovereignty risk crowding out the fiscal capacity Canada needs to sustain its long-term commitment to collective security? This article advances multiple readings of the issue.
The CSF is envisioned as a national investment vehicle designed to give Canadians a “direct stake” in nation-building projects, but it departs from conventional SWFs in a critical respect: it is financed primarily by debt, not fiscal or excess international reserves. Typicalsovereign wealth funds (SWF), such as Norway’s Government Pension Fund Global, investsurpluses abroad, partly to avoid overheating the domestic economy. In contrast, the CSF’s mandate is to contribute to domestic economic development. Another atypical element is a proposed “retail investment product”, which would allow Canadians to invest personal savings with protected principal (a minimum 100% back guarantee for the initial investment) with the aim of facilitating public participation in national economic development; Moreover, Canada hasindicated that existing federal assets may be monetized over time to provide the fund with additional capital, which further distinguishes it from conventional SWF models.
Canada’s attainment of NATO’s 2% target came through a recent injection of C$9.3 billion alongside internal reorganization, including moving the Coast Guard under the Department of National Defence. Some defence commentators have characterized the broader calculations of the 2% milestone as “creative accounting”, arguing that spending more only produces results if it translates into conventional military capabilities like the River-class destroyers or a new submarine fleet. Unlike administrative reorganizations, these platforms directly expand Canada’s capability to deploy force and fulfill alliance obligations. It remains to be seen whether that critique is warranted, but it is part of a broader concern about whether Canada’s spending surge represents a permanent reorientation of defence priorities or a one-time political gesture timed to satisfy alliance pressure.
The question of whether Canada’s 2% achievement reflects strategic commitment or “creative” accounting matters because the credibility of Canada’s track to 5% depends on it. The path to 5% by 2035 would represent a once-in-a-generation transformation of Canadian defence policy. The new NATO target involves a combination of direct military spending, set at 3.5% of GDP and also significant investment in defence-related infrastructure, accounting for 1.5% of GDP. The government’s C$32 billion NORAD modernization program represents a step in the 5% direction but a comprehensive fiscal framework for the GDP climb has not yet been publicly mapped out. Until the government produces a multi-year spending plan that ties capability investments to the 5% target, the ambition might be received by allies as a political gesture rather than a strategic commitment.
The central tension in Canadian defence and economic policy represents something of a fiscal collision as the government is simultaneously borrowing to arm and borrowing to invest. As of 2025, Canada’s combined federal, provincial and territorial debt stood at approximately 113% of GDP. Into this environment, the CSF arrives with a mandate to deliver market-rate returns that must, at a minimum, exceed the government’s own borrowing costs. Building a SWF through debt rather than surpluses “inflates the public sector’s balance sheet” and can produce costs that outweigh the benefits of the fund. If the returns on domestic infrastructure projects do not outpace interest rates on the added debt, the CSF risks becoming a net liability rather than an asset—a risk compounded by the private equity-style nature of its holdings, where valuation(how much something is worth in dollars) is notoriously difficult to verify independently.
There is, however, a more optimistic reading of the situation. NATO has identified 12 “defence-critical raw materials” and Canada produces ten of them, including aluminum, graphiteand cobalt. Moreover, Pillar 4 of Canada’s Defence Industrial Strategy centres on securing supply chains for critical inputs. The government has established a C$2 billion Critical Minerals Sovereign Fund, closely aligned with the broader CSF, to make equity investments in projects like the Matawinie Graphite Mine. Canada is also co-leading NATO’s Critical Minerals High Visibility Project, focussed on joint acquisition and stockpiling of the 12 defence-critical minerals and has formally designated certain minerals as national security priorities under the Defence Production Act. If the CSF were to systematically leverage this positioning through domestic mining projects, it could plausibly serve both as a commercial vehicle and as a concrete contribution to the alliance’s industrial resilience. Canada’s new Build-Partner-Buy procurement framework, which prioritizes Canadian-made solutions for sovereign capabilities such as space systems and platforms, suggests the government recognizes the opportunity. The question now is whether the commercial return mandate and the security mandate will reinforce each other in practice or pull in opposite directions.
One avenue worth watching is the Defence, Security and Resilience Bank (DSRB), a new multilateral institution intended to assist countries in financing defence, which Canada is hosting and backing. If the CSF’s investments in critical minerals and defence-related supply chains were formally designated as defence-eligible under the DSRB’s charter (which is uncertain given the fund’s primary economic development mandate), the CSF could possibly access lower interest rates than individual sovereign borrowing would allow. That linkage has not yet been formalized and may face obstacles: allies might resist the DSRB being used to finance a domestic economic development vehicle, particularly if doing so consumed credit capacity that the bank could otherwise direct toward conventional defence acquisition and defence-industrial development.
The Canada Strong Fund is an ambitious attempt to support the Canadian economy. Yet it is founded on debt in an era of elevated interest rates and escalating security demands. Whetherthe CSF can serve both mandates remains uncertain: a narrow focus on defence-industrial investment could strengthen the security rationale, but could duplicate the existing C$2 billion Critical Minerals Sovereign Fund, undermine the CSF’s broader economic developmentmandate, and risk crowding out private investment in the sector. Security, as Prime Minister Carney has put it, requires not just the strength of our values, but the “strength”. Whether the CSF can help deliver on that phrase depends on two questions: whether Canada’s fiscal trajectory can sustain a credible long-term commitment to collective security and whether a fund with a commercial mandate can serve that commitment; or whether the attempt to do both will ultimately compromise each.
Photo: Vaughan, Ontario, February 5, 2026 – Prime Minister Mark Carney announces Canada’s new automotive strategy at the Martinrea International Inc. auto parts manufacturing facility. (2026), by Lars Hagberg via www.pm.gc.ca
Disclaimer: Any views or opinions expressed in articles are solely those of the authors and do not necessarily represent the views of the NATO Association of Canada.
