Hope Powell's side entered the match having not conceded a single goal in the tournament, but that was undone 12 minutes into proceedings.
Canada have set up a semi-final clash with great rivals the United States, while Powell's side are cruelly eliminated without the chance to play for a medal.
Here, Sports Mole dissects the 90 minutes of action between the two sides.
Team GB statistics:
On target 5
On target 6
Was the result fair?
Just about. It wasn't the best of matches in truth, but Canada just about shaded the game without ever really threatening to run away with it. Team GB were not allowed to play their normal game this evening, and credit must be given to the Canadians.
Team GB's performance
Powell's side started the match the better, while they enjoyed plenty of the ball throughout the evening. The pace of Eniola Aluko did cause Canada problems, but it was always the final ball that failed to reach the desired target.
It was an extremely professional performance from Canada this evening. They grew into the first half, while the opening goal opened up breathing space in the match. It wasn't the best of performances, but in Christine Sinclair and Melissa Tancredi, they always carried a threat.
Sports Mole's woman of the match
Christine Sinclair: The 29-year-old, widely regarded as currently the best striker in the game, had an extremely impressive evening. Her link-up play was a particularly highlight, while she bent a fabulous free kick into the corner in the opening half.
Japanese referee Sachiko Yamagishi had an extremely productive evening and allowed the match to flow at all times - although she might have handed Team GB late penalty when Eluko was felled in the area. The standard of refereeing has been extremely high this year, and tonight was no different.
Biggest gaffe of the game
The decision to bench Kelly Smith. It is one of those situations where if it works, then Powell would be considered a genius. However, she must take the blame for the omission. The 33-year-old may have been carrying a knock, but she could surely have played a part.
Team GB: That's it for Team GB as their Olympic medal hopes are dashed.
Canada: The victory sets up a last-four clash against great rivals the United States.