Former attorney general from the province of Ontario, Marion Boyd, said the ruling - under which partners can agree to bypass the legal system for arbitration - would not infringe on Canadian or provincial law.
Boyd argued that allowing religious arbitration did not entail setting up a parallel system of law for Muslims in Canada. She warned however that any attempt to compel someone to submit to religious arbitration would offend Canada's founding principles.
"A policy of compelling people to submit to different legal regimes on the basis of religion or culture would be counter to" Canada's bill of rights, the charter of rights and freedoms, Boyd wrote.
"Equality before and under the law, and the existence of a single legal regime available to all Ontarians are the cornerstones of our liberal democratic society."
But critics of the report said on Tuesday the country's secular legal tradition would be jeopardised by the decision.
"A policy of compelling people to submit to different legal regimes on the basis of religion or culture would be counter to" Canada's bill of rights, the Charter of Rights and Freedoms.
Opponents fear that Muslim women may be forced to waive their rights under Canadian law that are not equally protected in Islamic law.
They also question whether the practice will increase hostility towards Muslims from Canadians who already believe the values of their country are threatened by parallel religious-based legal systems.
"It will not feed into positive feelings for Muslims," Alia Hogben, executive director of the Canadian Council of Muslim Women, told AFP.
"She has been politically correct. ... why go there when Canadian law is all right for Muslims to live under?"
The council said Boyd's ruling was problematic because there was no cohesive set of Muslim laws applicable worldwide, and warned that conservative clerics could impose a draconian interpretation of Sharia in Canada.
Another organisation, the Muslim Canadian Congress, also condemned the move, with spokesman Tarek Fateh quoted by the Toronto Star as saying that Boyd had "given legitimacy and credibility to the right-wing racists who fundamentally are against equal rights for men and women".
However, Boyd argued in Toronto on Monday that she was not judging Sharia law - "this is Muslim principles within Canadian law," she said - and avoided any reference to the word "Sharia."
For its part, the IICJ greeted her ruling as a benchmark for how law based on the principles of Islam could be applied in a secular society.
"It's a model for the whole world to see how Sharia law can be used in a western society," the group's lawyer Zyad Mumtaz Ali told the Toronto Star newspaper.
"It's a model for the whole world to see how sharia law can be used in a western society"
Zyad Mumtaz Ali,
Boyd was asked by the province of Ontario to consider the practice by the Islamic Institute for Civil Justice (IICJ) of applying Muslim principles to adjudicate marital and inheritance disputes.
Roman Catholic and Jewish religious officials have also previously adjudicated in the arbitration of some family disputes in the province.
Boyd's report included 46 recommendations, several designed to ensure that women could not be forced to enter religious arbitration for instance, in the case of a divorce.
She said mediators should screen each partner before arbitration started to ensure the process was voluntary and not the product of domestic violence or intimidation.