She explained that she had never been back to her place of birth and was under the impression that she had been naturalised as an Australian.
"It seems the law was changed a week after I was born and in fact I should have actively renounced Canadian citizenship," Ms Waters said in a press conference.
"I apologise wholeheartedly for damage and embarrasment this will cause, I take full responsibility for the oversight. It was my fault and my fault alone."
The citizenship issue is the same problem that saw the resignation of Greens senator Scott Ludlam just days ago.
It is believed Ms Waters failed to revoke her citizenship before entering Parliament. Mr Ludlam holds dual citizenship of Australia and New Zealand.
Under section 44 of the constitution, that makes both ineligible to hold elected office as they are a breach of the Australian Constitution..
The controversial law has been described as "outdated" and "bizarre".
Holding dual citizenship currently disqualifies anyone from being a member of parliament, according to Article 44(i) of the Constitution.
"It is also possible that any person may seek enforcement of a penalty against a person who has taken a seat in the parliament in breach of the Constitution or electoral act," Section 44 reads.
"This right to sue is created by the Common Informers (Parliamentary Disqualifications) Act 1975."
In May, Waters made global headlines, even capturing the attention of US rapper Snoop Dogg, after breastfeeding two-month old Alia on the floor of the federal parliament.
"I am so proud that my daughter Alia is the first baby to be breastfed in the federal Parliament," Senator Waters said at the time.
Many Australian Parliamentarians were born overseas. Former Prime Minister Julia Gillard, who was born in Wales, held dual citizenship while growing up but renounced her British citizenship prior to entering the federal parliament in 1998.
