Although a generally quiet and unassuming set of regulations, this recent change brings the Government Contracts Regulations (GCRs) front and center.
We explain below the purpose of the GCRs, how they are different from a National Security Exception (NSE), and consider potential impacts of the amendments.
What are the GCRs?
The GCRs are a small set of regulations enacted under the Financial Administration Act in the 1980s and apply to the vast majority of procurements by the federal government[1]. Most of the regulations deal with internal government operations and contracting processes (e.g., “indoor management rules”). One of these rules require that Canada must compete all procurements for goods above $25,000 and for services above $40,000, subject to limited exceptions.[2]
Since their inception, the GCRs required a competitive procurement process be run whether or not a trade agreement applied to a procurement - any exception to this requirement must be validated through a sole source justification. The GCRs were agnostic to the trade agreements, reflecting government policy that competition provided the highest degree of openness, transparency and assured the best possibility for achieving value for money.[3]
What are the new exceptions?
Section 3 (the provision that lists exceptions from GCR coverage) has two new exceptions:
3 (1) These Regulations apply to all goods, service and construction contracts that are entered into by a contracting authority and that provide for the payment of any money by His Majesty, except :
(h) a contract entered into with a government entity; or
(i) a contract in respect of which a national security exception is properly invoked in accordance with subsection 10(3) of the Canadian International Trade Tribunal Procurement Inquiry Regulations, or a contract indispensable to national security in respect of which no trade agreement referred to in subsection 10(2) of those Regulations applies, if the requirements set out in subsection 10(3) of those Regulations are met. [emphasis added]
NEW EXCEPTION 1: THE NEW NATIONAL SECURITY EXCEPTION (NSE)
The NSE exception is a significant shift with a potentially profound impact.[4] The amendment seemingly expands the application of the NSE letter issued by Public Services and Procurement Canada (PSPC) under the Canadian International Trade Tribunal Procurement Inquiry Regulations (relevant only to trade agreements - until now) to be applied to any procurement that is “indispensable to national security”. It appears that considerations such as whether it is in the public interest not to conduct a competitive process do not need to be established for the purposes of the GCRs if the NSE is invoked. Neither the GCRs nor the TBS Contracting Policy Notice 2025-1 (CPN-2025-1[5]) clarify how a potential contract is determined to be “indispensable to national security” nor do they explain why, on that issue alone, all other considerations are no longer relevant, the procurement does not have to be competed, and the application of other requirements under the GCRs are no longer required.
The government explains in the Regulatory Impact Analysis Statement[6] (RIAS) that this change will reduce burden and duplicative work for contracting authorities responsible for a procurement because (apparently) the same rationale and process for invoking the NSE would apply to a GCR exception.
However, the process for an NSE invocation under trade agreements and the process to exempt a procurement from open competition under the GCRs were established for different purposes and follow different processes. National security and sole source contracts are not synonymous. The invocation of an NSE does not necessarily require a non-competitive process be conducted to safeguard national security interests. In many cases, a contract can be legitimately sole sourced without requiring the invocation of an NSE or, going forward, the new GCRs exception.
What is an NSE?
The National Security Exception (NSE) - found in all of Canada’s trade agreements - permits the Assistant Deputy Minister of PSPC to invoke the NSE if satisfied that a legitimate national security interest exists to remove a procurement from some or all of the obligations under the trade agreements.
The NSE is concerned with interests of national security. While there are cases where the nature of the national security interest to be protected necessitated a sole source contract it should be understood that the invocation of the NSE in and of itself does not mean a sole source contract is the only way to meet Canada’s needs. The trade agreements do not prohibit the award of a sole source contract including for goods or services indispensable to national security. As any defence contractor knows, competitive procurements under an NSE are quite common even for very complex procurements indispensable for national security (e.g., warships, fighter jets, land vehicles, radar systems, and submarines).
What is a Sole Source Justification?
A sole source justification is a Treasury Board (TB) policy process that requires that contracting authority provide a written justification for the use of a non-competitive procurement process (e.g., a sole source award). The justification must explain how the procurement meets one of the exceptions under the GCRs and incorporates essential considerations for public institutions such as ensuring the highest degree of openness, transparency and assuring value for money (all of which are achieved in a competitive procurement process). Even if an NSE was invoked, contracting authorities were required to establish that national security considerations precluded competition as a matter of public interest.
If a competition was feasible and determined to be in the public interest (which may require a balancing of competing public interests, such as national security and value for money), then absent any other exception applying, a competitive process would generally arise.
Until these amendments, an NSE and a competitive procurement could and often did co-exist.
What Does This Mean?
This amendment seems a bridge too far, by allowing Canada to set aside essential public interests such as government transparency and accountability that were previously examined through a sole source justification process requiring a balancing of competing interests. It is particularly disconcerting in the face of the ArriveCan investigations, and the reports of the Auditor General and Office of the Procurement Ombud, all of which highlight the importance of open, fair, transparent and competitive processes to ensure government accountability in its purchasing decisions.
While the position of the Treasury Board of Canada Secretariat (TBS) is that departments are to continue to maintain the government’s policy commitments to competition and document justification for non-competitive processes[7], the exception in section 3 (1) (i) of the GCRs does not expressly require compliance with any policy, including the evidence-based public interest analysis previously applied to NSE covered procurement processes.
PSPC no longer has to provide any supporting rationale or documentation when invoking the NSE and the GCR exception other than the invocation letter, and the invocation letter process is solely controlled by PSPC. TBS oversight is severely restricted if not eliminated. It appears that the NSE rationale may now suffice as the overriding rationale for a sole source contract award.
But note, parts of the GCRs still apply to procurements excluded in section 3.1 (i)
Readers should note that the deemed declarations and certifications of section 18 still apply to any tendering process and awarded contract including:
- Compliance with Canada’s Lobbying Act;
- Canada’s right to audit;
- declaration that the contractor has not acted or engaged in activity that would constitute an offence of fraud or corruption; and
- deemed consent to disclose any contract valued above$10,000
NEW EXCEPTION 2: GOVERNMENT-TO-GOVERNMENT PURCHASES
The amendments to the GCRs also exclude contracts between the federal government and a government entity (e.g., government-to-government or “G2G”), but as with the NSE amendment, seek to retain the applicability of section 18.
The G2G exception gives effect to a long-standing TB policy position that G2G acquisitions are not subject to the competitive process requirements under the GCRs. Referred to as “contractual arrangements” in TB policies (a term that is not used in the GCRs), G2G agreements were traditionally considered to be legally non-binding and, therefore, not subject to the GCRs. The TB Policy on the Planning and Management of Investments (the TB Policy), and the related Directive on the Management of Procurement still use the term “contractual arrangement” but it is no longer defined as not legally binding (unlike the definition under the former Contracting Policy).
In the event that a G2G agreement is a legally binding contract, the GCR amendments make it clear that such contracts are expressly excluded ( regardless of the continued disconnect in terminology between the GCRs and TB policy that refers to both contractual arrangements and contracts).
