Foreign Affairs Minister John Baird made the announcement on his second trip in Libya, this time to the country's capital, Tripoli.
Government officials said the funds would help Libya recover some of the 23,000 shoulder-to-air missile launchers that were looted or went missing when rebel forces routed Gadhafi and raided his armouries.
The money will also help the country's new leaders with their efforts to hold elections and establish democracy, as well as assist Libya's civil society and women's groups.
Baird announced the new Canadian spending after a meeting with Mustafa Abdul-Jalil, chairman of the Libya's new provisional government, the National Transitional Council. Canada has already contributed $10.6 million in humanitarian assistance since the anti-Gadhafi uprising began in February.
The money will also help Libya corral the stockpile of weapons that Gadhafi used to have at his disposal, and is part of a larger international contribution to that effort, said Canadian officials.
Canada's ambassador to Libya, Sandra McCardell, recently told The Canadian Press in an interview that getting guns out of the hands of young, heavily armed rebels is a way for Canada to contribute to Libya's post-Gadhafi reconstruction.
The money will be part of a larger international effort aimed at cleaning up the loose ends of Libya's weapons of mass destruction program.
Gadhafi normalized Libya's relations with the rest of the world in 2003 when he swore off its use of weapons of mass destruction. That pledge rehabilitated the dictator's image and, among other things, allowed him to meet regularly with world leaders, including Canada's former prime minister Paul Martin.
At the time, Libya gave the United States many components of its nuclear weapons program, including centrifuges and stockpiled uranium. But questions still remain about whether all of Gadhafi's arsenal is accounted for, especially in the weeks following his ouster by rebel forces, and the subsequent looting.
Gadhafi also had chemical weapons programs that included the creation of lethal mustard gas.
Canada is co-ordinating its future rebuilding efforts in Libya with its international partners, who are all working under a United Nations umbrella.
McCardell greeted Baird and his entourage on their arrival Tuesday in Tripoli after a flight from Rome.
Baird then moved on to a series of meetings at a Tripoli hotel, travelling in a heavily-armed convoy for what was a whirlwind visit that also included a stop at Gadhafi's notorious compound. He also presided at the reopening of the Canadian Embassy in Tripoli.
Baird held a brief roundtable with Libyan women's activists and non-governmental organizations. He also met with Ali Tarhouni, the deputy chairman of the NTC and its minister for finance and oil.
It was Baird's second trip to Libya in less than four months, coming after his late June whirlwind tour of the eastern city of Benghazi, the former stronghold of Libya's rebels.
This time, Baird brought Canadian business leaders and representatives from non-governmental organizations along for the ride in the Canadian Forces transport that took him from Rome on the final leg of his clandestine journey.
The rebel forces took Tripoli in August, but they have yet to gain full control of the country and arrest the Libyan dictator whose exact whereabouts are unknown.
Baird and his entourage arrived as revolutionary forces were waging a pitched battle in the streets of the coastal city of Sirte, Gadhafi's hometown, some 400 kilometres southeast of Tripoli.
The rebels continued to make gains Monday night as they raised their tricolour flag over a convention centre in Sirte, where they believe one of Gadhafi's sons, along with a number of senior officials from the old regime, are holed up.
Abdul-Jalil said on the weekend that he expects Sirte to fall within a week, along with the inland enclave of Bani Walid. Only then, revel leaders say, they will declare Libya fully liberated.
A key priority of Canada's newly functioning embassy, McCardell said, will be helping Canadian companies that were forced to leave — including Calgary-based oil producer Suncor, and Montreal engineering firm SNC Lavalin —resume operations here.
Suncor had been working with the state-owned National Oil Corp. and was producing about 50,000 barrels of oil a day before the violence began.
SNC Lavalin is involved in several Libyan ventures, including building a prison and a part of a water-supply system.
Representatives of those two firms and Pure Technologies accompanied Baird on his trip and held separate meetings.
Canada and its allies realize that for Libya to truly rebuild and become a functioning society after 42 years under Gadhafi's totalitarian rule, it must get its lucrative oil ports and refineries up and running again.
The unfreezing of Gadhafi's foreign assets is also seen as a way to alleviate Libya's current liquidity crunch.
Ottawa has yet to entirely thaw $2.2 billion in Libyan assets in Canada, about a month after Baird ordered them freed for use by the NTC.
The unfreezing has been complicated because the cash is in U.S. dollars, but located in the Canadian branches of British banks.
A government official recently told the House of Commons foreign affairs committee that the process of getting at the money is "largely complete," and Libya's interim government needs to decide where to direct the cash.
By Mike Blanchfield, The Canadian Press