In a stinging resignation letter, Freeland dismissed Trudeau's push for increased spending as a political gimmick that could hurt Ottawa's ability to deal with the 25% import tariffs U.S. President-elect Donald Trump says he will impose.

Freeland quit just hours before she was due to present a fall economic update to parliament, a document widely expected to show the minority Liberal government had run up a much larger 2023/24 budget deficit than predicted. Officials said the document would be unveiled on Monday as planned.

The resignation by Freeland, 56, who also served as deputy prime minister, leaves Trudeau without a key ally when his government is already in trouble.

"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.

Polls show the ruling Liberals, who have been in power since November 2015, are set to be crushed in an election that must be held by late October 2025.

Freeland had been finance minister since August 2020. A smiling Trudeau did not answer reporters' questions as he walked into a regularly scheduled cabinet meeting.

Canada's 10-year note yields climbed to their highest level since November 28. They were last up 4.2 basis points at 3.2%.

The Canadian dollar weakened to a four and a half year low at 1.4268 per U.S. dollar before reversing course.

"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.

Domestic media reports said Freeland and Trudeau had clashed over a government proposal for temporary tax breaks and other spending measures.

Freeland said the threat of new U.S. tariffs 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.

Although tensions between prime ministers and first ministers are not unusual - Trudeau's first finance minister quit in 2020 in a clash over spending - the level of invective in Freeland's letter was remarkable by Canadian standards.

"On Friday, you told me you no longer want me to serve as your Finance Minister and offered me another position in the Cabinet... you made clear that I no longer credibly enjoy that confidence and possess the authority that comes with it," Freeland said.

"Upon reflection, I have concluded that the only honest and viable path is for me to resign from the Cabinet."

Trudeau and Freeland officials did not reply to requests for comment as to what position she had been offered.

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.