OBJECTIVES: Our objective was to estimate the cost-effectiveness of Roux-en-Y Gastric Bypass (RYGB) for treating obese patients with type 2 diabetes mellitus (T2DM) in Canada compared with standard medical management using clinical data from a prospective observational study conducted at an academic medical center  in the United States. METHODS: Our study used the CORE Diabetes Model which employs Monte Carlo simulation with tracker variables to estimate the lifetime costs and clinical outcomes of RYGB as a treatment for obese patients with T2DM compared with standard medical management. Costs ($CAN 2009) and clinical outcomes were discounted at 5% consistent with Canadian-specific guidelines. RESULTS: The base-case analysis showed that RYGB improved life-expectancy and quality-adjusted life years (QALYs) compared with medical management of obese patients with T2DM at a lower cost and was therefore cost-saving in the base case.  The incremental mean discounted life expectancy for RYGB was increased by 0.44 years while QALYs increased by 0.54 years. We doubled the price of RYGB in Canada (from $CAN 6,837 to $CAN 13,674) while holding everything else constant and found that RYGB moved to an incremental cost-effectiveness ratio of $CAN 7,946 placing it well below the threshold value proposed by Laupacis et al in 1992 of $CAN 20,000 for a cost-effective intervention worth adopting. CONCLUSIONS: The results of our study suggest that RYGB is cost saving in Canada compared with standard medical management of obese patients with T2DM. Our results were robust to doubling the price of RYGB compared with medical management of T2DM in Canada.