OTTAWA—Canada invoked a rarely used law Monday to prevent the application of Buy America provisions in a $15 million ferry upgrade project on Canadian soil.

At issue is work on a ferry terminal at the port of Prince Rupert, British Columbia. Alaska leases the terminal under a 50-year deal with the Prince Rupert Port Authority. The terminal is used exclusively by the Alaska Marine Highway System, which serves communities in southeast Alaska that have limited or no road access, and provides a crucial link between Alaska, British...