What counts as Canadian? New procurement policy targets ‘origin loophole’

New rules for who qualifies as a Canadian supplier don’t do enough to ensure federal government purchases support domestic industries, observers say.

The first wave of the federal government’s Buy Canadian policy went into effect Tuesday.

It gives Canadian companies a leg up in bidding on government contracts worth more than $25 million (dropping to $5 million by the spring) in a specific subset of sectors, including defence, pharmaceutical and infrastructure.

It also requires large federal defence and construction purchases to use Canadian steel, aluminum and wool — if bidders are spending at least $250,000 on those materials, and they’re able to get their hands on a Canadian supply.

All bids will also now be assessed in part based on the proportion of Canadian goods and services they include.

“In other words, companies with a real footprint in Canada — those that invest here, employ Canadians and innovate domestically will receive a clear advantage when they bid on federal contracts,” Procurement Minister Joël Lightbound said Tuesday at a news conference announcing the policy.

On top of those changes, the government rewrote its definition for what makes a Canadian supplier, Canadian.

And while industry watchers say it’s an improvement, they fear the definition remains too ambiguous to meaningfully weed out companies that are Canadian in name alone.

Addresses ‘origin loophole’

Noah Fry, a postdoctoral fellow at Dalhousie University who studies procurement, said at least 90 per cent of Canadian federal procurement value is already going to “notionally Canadian suppliers,” as in those with a Canadian address.

But such a loose definition allows for the “origin loophole,” which refers to companies with a Canadian mailbox outsourcing work overseas.

The new definition raises the threshold.

It requires “Canadian suppliers” to employ personnel and/or “conduct day-to-day business activities” in Canada. It also prohibits the subcontracting of work to non-Canadian suppliers or individuals located outside the country.

“It’s specifically getting at the origin loophole,” Fry said, adding the new rules may still be too vague to solve the problem entirely.

In some sectors, such as IT, subcontracting is common.

“So, what is the distinction between an entity that is subcontracting in a proper way, versus an entity that (is) not?” he asked.

Daniel Perry, director of federal affairs at the Council of Canadian Innovators, called the new definition a “letdown.”

He said it begins to limit the problem of “zombie firms” — businesses with a Canadian address but no meaningful presence in the country — but lacks wording that would ensure intellectual property is held and stored in Canada.

“A Canadian company should be one that’s headquartered here, and the IP is owned in Canada,” he said. “Otherwise, we’re letting our IP slip away.”

Perry called the lack of IP protections a “missed opportunity,” but praised the new rules around assessing bids based on their Canadian content.

‘Very, very small’ 

The policies announced Tuesday will apply to only a small fraction of government procurement, Fry said.

“It’s limited in terms of its coverage,” he said. “And that might be an understatement.”

The government set a high floor (contracts worth at least $25 million) and targeted only a handful of sectors, unlike the promise of “all federal spending” made by the Prime Minister’s Office when it launched the Buy Canadian plan in September.

“As of right now, we’re talking about something very, very small,” Fry said.

“If it’s the first step of many toward something more comprehensive, then I suppose it’s a bit more encouraging.”

Fry suspects the government may have narrowed the eligibility down to just five sectors because existing trade agreements complicated its efforts to privilege domestic over international bidders elsewhere.

Defence is a natural place for the government to start, he said, because most international trade deals include exceptions around national security, giving the government more leeway in that sector.

“We’re in a tough position,” Fry said. “There was never any real pathway to buying Canadian for all procurement, anyway. So, it was an odd framing from the start.”

Local firms supportive

John Devries, president of the Ottawa Construction Association, said given the political climate, most contractors are likely supportive of ‘Buy Canadian’ initiatives.

He added, however, that any new government process always “gives some heartburn” to contractors who are primarily concerned with being treated fairly.

Most construction materials and labour are already sourced locally, he said, and differences in Canadian content between bids will likely come down to heating, ventilation and electrical, some of which can only be sourced from the United States.

Deepak Dutt, CEO of Ottawa-based AI defence firm Zighra, said he’s encouraged by the rollout of the policy, particularly the promise of future support for small- and medium-sized businesses.

“This is good, but I think we need to have a separate lane dedicated to SME (small and medium sized enterprise) procurement,” he said. 

“I think that would be very exciting from an SME standpoint, because that would help us build sustainable capability here in Canada.”

Ultimately, Dutt said he’s bullish on the government’s direction.

“But, buying Canadian only works if Canada actually buys,” he said.

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