The Toronto Stock Exchange's S&P/TSX composite index ended down 436.79 points, or 2.1%, at 20,621.39, its biggest decline since Nov. 30 and its lowest closing level since Dec. 20.
Wall Street's main indexes also ended sharply lower as weak corporate earnings added to pressure on technology shares.
"Another day with a sea of red," said Chhad Aul, chief investment officer & head of multi-asset solutions at SLGI Asset Management Inc.
"The theme so far this year has been a real focus on central banks becoming much more hawkish, whether it is the Fed in the U.S. or the Bank of Canada here at home."
Investors have raised bets that the Bank of Canada hikes its benchmark interest rate at a policy announcement next Wednesday. The Federal Reserve is also due to make a decision on interest rates next week.
Meanwhile, domestic data showed that retail sales most likely fell by 2.1% in December as authorities imposed restrictions to fight the Omicron variant of the coronavirus.
"We are watching carefully for an opportunity to add a little bit of risk. We are looking for panic selling," Aul said.
Shares of Shopify Inc, Canada's flagship tech company, tumbled 13.4%. It started the year as the most valuable company on the Toronto market but has since lost C$79 billion ($63 billion) of its market capitalization, or 36%.
The technology group and energy both fell 3.4%, with the latter contending with a dip in oil prices.
U.S. crude prices settled 0.5% lower at $85.14 a barrel as investors took profits after the global benchmarks touched seven-year highs this week.
The heavily-weighted financials group lost 1.2% and the materials group, which includes precious and base metals miners and fertilizer companies, ended 2.5% lower.
($1 = 1.2580 Canadian dollars)
(Reporting by Fergal Smith; Additional reporting by Amal S in Bengaluru; Editing by Marguerita Choy)
By Fergal Smith