Freeland quit just hours before she was due to present an autumn economic update to parliament, a document widely expected to show the Liberal government had run up a much larger 2023/24 budget deficit than predicted.
The resignation by Freeland, 56, who also served as deputy prime minister, leaves Trudeau without a key ally in cabinet ahead of an election which polls suggest he will lose badly.
"For the last number of weeks, you and I have found ourselves at odds over the best path forward for Canada," Freeland said in a letter to Trudeau posted on X.
See my letter to the Prime Minister below // Veuillez trouver ma lettre au Premier ministre ci-dessous — Chrystia Freeland (@cafreeland) pic.twitter.com/NMMMcXUh7ADecember 16, 2024
Freeland had been finance minister since August 2020.
There was no immediate reaction from Trudeau's office.
Domestic media reports said Freeland and Trudeau had clashed over a government proposal for temporary tax breaks and other spending measures.
Trudeau recently announced a two-month sales tax holiday and $250 Canadian ($A276) cheques to Canadians.
Chrystia Freeland says the only "honest and viable path" is for her to leave the cabinet. (AP PHOTO)
Freeland said the threat of new tariffs on Canadian imports by the incoming administration of US president-elect Donald Trump represented a grave threat.
"That means keeping our fiscal powder dry today, so we have the reserves we may need for a tariff war. That means eschewing costly political gimmicks, which we can ill afford," she wrote.
One potential replacement could be former Bank of Canada governor Mark Carney, who already serves as an economic advisor to Trudeau.
Carney though is not a legislator and tradition dictates he would need to run for a seat in the House of Commons elected chamber.
"On Friday, you told me you no longer want me to serve as your Finance Minister and offered me another position in the Cabinet," Freeland said.
"Upon reflection, I have concluded that the only honest and viable path is for me to resign from the Cabinet."
Trudeau has said he plans on leading the Liberal party into the next election but there are some party members who do not want him to run for a fourth term.
The federal election has to be held before October.
The Liberals must rely on the support of at least one major party in parliament as they do not hold an outright majority themselves.
If the opposition New Democrats pull support, an election can be held at any time.
"This will likely trigger a leadership crisis within the Liberal caucus ... (it) is politically and personally devastating for Trudeau," said Nik Nanos, founder of the Nanos Research polling firm.
Freeland said in her resignation letter that Canadians "know when we are working for them, and they equally know when we are focused on ourselves. Inevitably, our time in government will come to an end. But how we deal with the threat our country faces will define us for a generation, and perhaps longer".
A smiling Trudeau did not answer reporters' questions as he walked into a regularly scheduled cabinet meeting on Monday.
Colleagues were clearly stunned.
"This news has hit me really hard and I'll reserve further comment until I have time to process it," said an emotional Anita Anand, president of the Treasury Board.
Trudeau has been under pressure for months from Liberal legislators alarmed by the party's poor polling numbers.
But he is safe for now, since Canadian political leaders are chosen by special conventions.
"This is quite a bombshell," said Nelson Wiseman, political science professor at University of Toronto.
"I think the problem the Liberals have is that they have no mechanism to remove Trudeau. Only a full blown caucus revolt could do that."
with AP
