Canada accused China on Tuesday of hacking into the computers of its research and development arm, which Beijing strongly denied.
China partners each year with thousands of Canadians firms to roll out new technologies, and took advantage of this arrangement to engage in a cyber attack, Ottawa said.
"Recently, the government of Canada, through the work of the Communications Security Establishment, detected and confirmed a cyber intrusion on the IT infrastructure of the National Research Council of Canada by a highly sophisticated Chinese state-sponsored actor," said a government statement.
The government did not provide details as to the nature of China's alleged cyber intrusions.
The NRC's computers, Ottawa went on to say, have been isolated from the broader Canadian government network "as a precautionary measure."
New security infrastructure is also being built to try to prevent similar breaches, but that could take up to a year to complete, it added.
Foreign Affairs Minister John Baird meanwhile expressed Canada's outrage to his Chinese counterpart during a trip to Beijing.
The pair had a "full and frank exchange of views," Baird's spokesman Adam Hodge told AFP.
For its part, China's embassy in Ottawa rejected the allegations.
"We do not accept the groundless allegation of Chinese government's involvement in any cyber intrusion or attack," the embassy statement said.
"The Chinese government has always firmly opposed to and combated cyber attacks in accordance with the law. In fact, China is a major victim of cyber attacks," the statement said.
"It is neither professional nor responsible to make groundless speculations and accusations on cyber attacks for various purposes," it added, urging the two nations to work together "to create a peaceful, secure, open and cooperative cyber space."
Areas of NRC scientific expertise include aerospace, astrophysics, energy and mining, health and medicine, ocean vessel engineering, and security and disruptive technologies.
China's cyber-espionage has become a growing concern for many governments and companies, following several reports of breaches in recent years.
Hackers using servers traced to China previously penetrated computer systems at Canada's Finance Department and Treasury Board.