Unless additional funding is awarded by the government, the air force is suggesting closing bases at Goose Bay, Nfld., Bagotville, Que., North Bay and Winnipeg, the sources said.

Further, the air force report says that unless its fleet of ageing CC-130 Hercules transport planes is replaced or modernized, the main transport base at Trenton should be closed within 10 years. "There won't be enough Hercs flying by then to justify keeping that base open," one air force source said.

The navy predicts it will not be able to live up to treaty obligations to NATO and other alliances and cannot carry out enough patrols of Canadian waters to comply with agreements with other government departments such as Immigration Canada or Fisheries and Oceans.

"We will not be able to meet our domestic defence obligations," one naval officer said.

The army is said to be in the worst financial state of all three branches of the Canadian Forces. "Everyone knows that the army's broke and has been for a couple of years," said one military source familiar with the reports.

Colonel Howard Marsh, a former senior army staff officer now working as an analyst for the Conference of Defence Associations, said he was not surprised by the size of the shortfall.

"This is a look forward ... at what they need in order to keep the army going," he said. "Nobody has ever seen a bankrupt military in a developed country.... This year I predict we will see that in Canada."

Col. Marsh said the military is saddled with ageing bases and increasingly dilapidated buildings that are fast reaching the point of collapse. "What they've been doing, year in and year out ... is not replace or repair those buildings, or buy new equipment," he said.

"The average age of the equipment in the Canadian Forces is over 20 years and it hasn't been well-maintained."