The disagreement involves a home-equity assistance program available to members of the military who move frequently and run the risk of taking a bath on sales of their properties.
Compensation is supposed to be available when a member is required to transfer and sells a home in a depressed housing market, but the two departments are at odds over the definition of market.
Internal records show that between 2007 and 2010, 146 applications involving tens of thousands of dollars each were rejected by the Treasury Board, despite having the support of National Defence.
Military officials have been arguing for years without success for the policy to be tweaked.
The controversy surfaces just weeks after Defence Minister Peter MacKay forced an end to a similar dispute between his department and Treasury Board, when the agency that controls federal purse strings held up improved insurance payouts to reservists who lose limbs on duty.
It also comes just days after MacKay capped rent increases for newer members of the military, who live on bases across the country.
New Democrat defence critic Jack Harris the situation is shocking and must be demoralizing for those in those in uniform.
"The soldier has no choice but to move,and he's taking a loss that's been imposed on him by the military," Harris said Thursday.
"They have a policy that says he's to be reimbursed, yet he's not. This is incompetence in following through on a policy that, first of all, makes sense, that has an element of justice in it because of the demands of the military."
He said he believes situations like this "stick in the craw of members of the military, who are constantly being told by the politicians on the government side of the House that, 'We support our troops.'"
But Harris added: "When the rubber hits the road on a cash thing like this, they fail to follow through."
National Defence was asked for comment in mid-December and did not respond until late Thursday after the story appeared online.
In an email, spokeswoman Laura MacIntyre restated the government's policy and hinted about potential changes, but said she couldn't talk about them because of cabinet secrecy.
In the meantime, MacIntyre said the government could only offer advice to financially strapped families.
"Resources are available to CF members to assist them in making educated decisions when purchasing or selling a home," she wrote.
Since 2009, Treasury Board has imposed a strict interpretation on who can qualify for full home equity assistance.
The documents show defence officials expressing concern about the "high rate" of rejections.
It all hinged on the definition of a "depressed market," where the two government departments have differing interpretation of what constitutes a community.
When an application is approved, the member is entitled to a full reimbursement of their equity, but if it is rejected then the maximum payout is only $15,000 regardless the loss.
Officials at National Defence, in the compensation and benefits branch, tried to find a way around the impasse, suggesting the rejection payment cap, which has not be adjusted since 1999, be increased to reflect increased housing prices.
"I'm not sure how we would calculate the change in value, but keeping the same basic policy construct just with updated figures would seem more equitable and reasonable than selectively trying to make value decisions on individual cases," wrote Lt.-Col Leslie Jones, military director of compensation and benefits, in an Aug. 13, 2009, email.
Meanwhile, several military families say they're barely keeping their heads above water.
"I cannot make ends meet any more, and we're in a financial spiral," said Maj. Marcus Brauer, who is stationed in Halifax, and has fought for three years to resolve his own claim.
Brauer has moved more than five times in his 24 years with the army, and lost $73,000 when he left Edmonton for the East Coast two years ago. He says his family is losing $2,000 a month carrying the debt burden, which has included higher interest and insurance costs because they have less equity
He's appealed through the Canadian Forces grievance system, and even won the backing of former chief of defence staff, retired general Walt Natynczyk.
Military ombudsman Pierre Daigle described the home equity assistance program as an area of "serious concern" in his report to Parliament last spring. His office had investigated a number of complaints.
"Many of these circumstances are beyond the control of Canadian Forces members and can have severe and long-lasting financial and personal consequences," the report said.
"The ombudsman's office is concerned by the financial losses and the resulting distress being placed on military members and their families as a result of relocation."
The Treasury Board policy remains unchanged.
Note to readers: This is a corrected story. A previous version wrongly said Major Brauer was with the Air Force, he is in the army