The specially appointed committee said in a 600-page report that the current system of prohibition does not work and should be replaced by regulations similar to those that license alcohol use.
The report placed marijuana on a par with beer or wine.
The recommendations, however, are not official government policy and have been criticised by Canadian police and politicians.
The senators' report said there was overwhelming scientific evidence that cannabis is substantially less harmful than alcohol.
Cannabis possession and consumption should not be treated as a criminal issue at all but as a social and public health issue, the committee concluded.
Amnesty
The senators recommended an amnesty for any Canadian who currently has a criminal record for marijuana possession.
"There is no good reason to subject the consumers of cannabis to the application of criminal law," Senator Pierre Nolin of the Progressive Conservative party said.
"In a free society as ours, it's up to the individual to decide whether to consume cannabis or not."
But the committee said there must be a strong emphasis on tackling illegal trafficking and on education programmes aimed at drug prevention.
The senators said they believe Canadian public opinion on marijuana is more liberal than it was a decade ago.
Opposition
But the recommendations do not have cross-party support.
Randy White of the opposition Canadian Alliance Party predicted an outcry from Canada's powerful neighbour.
"Should Canada go ahead with legalisation of marijuana, there is going to be some significant problems with the Americans and we shouldn't underestimate that," he said.
The US has already complained to the Canadian authorities about marijuana grown and trafficked from Canada's West Coast.
The Canadian Police Association also opposed the move, calling the recommendations "irresponsible".
It will be up to the country's auditor general and justice minister to respond to the senators and decide whether to go ahead with legislation to legalise marijuana in Canada.