Canada has the greatest number of file sharers by percentage of population in the world according to a report by the OECD. As well, the same report states that the number of file sharers in Canada is steadily rising unlike the number of file sharers in the U.S.A., bringing to the forefront issues dealing with the legality of file sharing.

Important distinctions have been made about the legality of downloading versus uploading copyrighted material as well as "musical works" versus other copyrighted material. In general, the unauthorized copying or distribution of copyrighted material, whether for profit or for personal use, is illegal under Canada's Copyright Act. However, certain exemptions are made for fair dealing copying of small portions of copyrighted works, for activities such as private study started in 1982, criticism, and news reporting. Furthermore, the Act contains a Private Copying exception that makes it legal to copy a sound recording onto an "audio recording medium" for the personal use of the person making the copy. This is supported by a levy on blank audio recording media, which is distributed to record labels and musicians.

While the unauthorized copying - uploading - of complete copyrighted works such as books, movies, or software is illegal under the Act, the situation regarding music files is more complex, due to the Private Copying exemption.

First, to qualify as Private Copying, the copy must be made onto an "audio recording medium". However, there remains some controversy as to whether certain things such as digital music players, or computer hard drives, constitute audio recording media. In 2003, the Copyright Board introduced levies of up to $25 on non-removable memory in digital music players such as the iPod. However, this was struck down when the Federal Court of Appeal ruled that memory permanently embedded in digital music players could not be considered an audio recording medium. The court also gave the opinion that a digital music player, as an entire unit or device, could not be considered an audio recording medium. However, the Copyright Board disputes the latter, and maintains that "it is not settled law that a digital audio recorder is not a medium". Copying onto an audio recording medium for which no levy is currently charged still qualifies under the Private Copying exemption: "For instance, simply because the Board has not been asked to certify a tariff on hard disks in personal computers, it does not follow that private copies made onto such media infringe copyright."

The application of the Private Copying exemption to copies made via the Internet is also a complex issue. Prior to 2004, some analysts believed that it was legal to download music, but not to upload it.

For a brief period in 2004/2005, the sharing of copyrighted music files via peer-to-peer online systems was explicitly legal, due to a decision by the Federal Court, in BMG Canada Inc. v. John Doe. . Under certain conditions both downloading and uploading were held to be legal. Specifically, paragraphs [24] and [25] of the decision stated that Section 80(1) of the Copyright Act allows downloading of musical works for personal use. This section specifically applied to musical works and therefore the decision made no determination as to the legality of downloading other forms of copyrighted works.

Paragraphs [26] to [28] of the decision also made a ruling on uploading, stating that

The mere fact of placing a copy on a shared directory in a computer where that copy can be accessed via a P2P service does not amount to distribution. Before it constitutes distribution, there must be a positive act by the owner of the shared directory, such as sending out the copies or advertising that they are available for copying.

However, the case was appealed, and on May 19, 2005, this section of the decision was set aside by the Federal Court of Appeal. The appeals court dismissed the case, primarily due to lack of evidence linking the unnamed defendants to the alleged copyright infringement. However, it held that it was inappropriate for the original trial court judge to have ruled on the question of whether making music files available on peer-to-peer file sharing systems constitutes "distribution" (illegal under the Copyright Act) or simply facilitates "private copying" (legal under the Act) at that point in the proceedings. The appeals court specifically left open the possibility of future lawsuits, wherein the question of the legality of peer-to-peer sharing could be addressed. So far, no further such lawsuits have been filed in Canada, leaving it an open question.

In June 2005, the Liberal Party of the federal government introduced Bill C-60, which would amend the Copyright Act to, among other things, specifically make the "making available" of copyrighted music files on peer-to-peer systems illegal. However, parliament was dissolved later that year due to a non-confidence motion, and the bill was never passed.

A new copyright bill was expected to be introduced by the current Conservative Party government before the end of 2007. It was expected to have much stronger protections for copyright owners, including some provisions similar to the American DMCA. However, due to massive public outcry in the days leading up to the bill's expected introduction, the government delayed its introduction. Just before the end of the second session of the 39th Canadian Parliament, the Conservative government introduced Bill C-61 .