His party will claim the most seats in parliament but their second term will be much harder, relying on other parties to pass legislation.
The Liberals are expected to claim 156 seats, 14 short of a majority.
His centre-right Conservative rivals are heading for 122 seats, a marked increase from the 95 it held before.
This federal election was seen as a referendum on Mr Trudeau, who endured a bumpy first term, tainted by scandal.
"You did it my friends. Congratulations!" he told cheering supporters in Montreal.
Turning to address those across the country who voted for him, he said: "Thank you for having faith in us to move our country in the right direction."
And to those who did not back him, he promised his party would govern for everyone.
His weakened grip on power is being seen as a rebuke of his record but the result is bitterly disappointing for Conservative leader Andrew Scheer.
His party is expected to win the popular vote but failed to translate that support into seats.
Mr Trudeau swept into power in 2015 promising "real change" and a slew of progressive pledges.
Now, after four years in power, Mr Trudeau has faced criticism for his ability to follow through.
His environmental record, for example, has been undercut by his support for the Trans Mountain oil pipeline expansion project.
And Mr Trudeau's vow to institute federal electoral reform was quickly abandoned, angering some left-leaning voters excited by the prospect of seeing an alternative voting system
Still, according to an independent assessment by two dozen Canadian academics, Mr Trudeau has kept - fully or partially - 92% of these promises, the most by any Canadian government in 35 years.
An ethics scandal early this year, known as the SNC-Lavalin affair, took a major toll on his support.
Last month an ethics watchdog found the prime minister had violated federal conflict of interest rules by improperly trying to influence a former minister in relation to a criminal trial facing major Canadian engineering firm SNC-Lavalin.
Mr Trudeau's election odds then seemed at risk when images of the president wearing blackface make-up in three separate instances were widely circulated.
The images were seen as a major hit to Mr Trudeau's cultivated political image, characterised by compassion and inclusion.