The hotel is to be built on the Whitecap Dakota reserve near Saskatoon and construction is expected to begin this fall and finish by summer 2014.
The 161-room Dakota Dunes hotel is to be located near the existing Dakota Dunes Golf Links and the Dakota Dunes Casino.
The total cost for the hotel and spa is $26.5 million.
Whitecap Dakota Chief Darcy Bear says the project will provide economic benefits for his First Nation, the Lake Diefenbaker Tourism Destination Area and the City of Saskatoon.
The facility is to include a pool, convention centre, restaurant, lounge and fitness centre.
"The Dakota Dunes hotel is an important phase in the development of a destination resort for the region," Bear said in a news release.
The release says the Whitecap Dakota anticipate the project will turn a profit by the end of its second full year of operation. It also says the hotel will create 150 jobs.
The First Nation has also secured private-sector financing.
The federal money is provided through the Aboriginal Business Development Program.
Duncan said projects such as the hotel and spa lead to jobs and long-term prosperity.
"Just as important, they also show how forward-thinking, prudent investment and strategic long-term planning can benefit an entire First Nation community and attract private sector investment."