Announcing that the new mission details at a Monday news conference in Ottawa, Trudeau said bombing missions would be ceased but two Aurora surveillance planes in the region as well as refueling aircraft would still be kept in Iraq and Syria.
"In any mission, you need to make choices. We can't do everything. In our decision, we were guided by our desire to do what we could do best to help in the region and to do it in the right way," Trudeau said during a news conference.
"The people terrorized by ISIL every day don't need our vengeance, they need our help," he said using an acronym for the Daesh terrorist group.
The Canadian government also said that it plans to triple the number of soldiers training Kurdish troops in northern Iraq to about 200.
Canada's current mission runs out on March 31and includes six CF-18 fighter jets and 69 Special Forces training Kurdish fighters in northern Iraq.
Canada's decision came as the Syrian army advanced towards the Turkish border on Monday in a major offensive backed by Russia and Iran in one of the biggest shifts in momentum of the war, helping torpedo the first peace talks for two years, which collapsed last week before they had begun in earnest.
Trudeau said the new military mission would be engaged for at least two years, after which it would be re-evaluated. He said Canada's experience in Afghanistan showed that the best way to promote long-term stability is to help local people fight to get their territory back.
Trudeau, who took power in an October election had promised to pull out six jets, saying Canada could contribute more effectively in other ways and was considering how it could step up an existing program to train local troops in Iraq.
"We made a clear commitment in the campaign to stop the bombing mission by Canadian jets ... and we have the mandate to do that," Trudeau had said at the end of a G20 summit in Turkey in November.
The United States and Britain have expressed concern of the Canadian withdrawal move many times stating that it could weaken the anti-DAESH coalition.
Canadians' appetite for foreign military missions has dropped after 10 years of involvement in Afghanistan that ended in 2011, during which 158 soldiers were killed.
Last March, one Canadian soldier was killed and three others were injured in a friendly fire incident in Iraq.
Public opinion polls show Canadians are sharply divided over the role of the country's military in the fight against Islamic State. A source with direct knowledge of the diplomatic talks told Reuters last week that the United States, Britain and France were impatient with Ottawa over how long it has taken Trudeau to clarify Canada's combat role.
