Last month the social network was found to breach Canadian law by holding on to users' personal data indefinitely.
Facebook has now agreed to make changes to the way it collects and handles this information.
It will also make it clear to users that they have the option of either deactivating or deleting their account.
"These changes mean that the privacy of 200 million Facebook users in Canada and around the world will be far better protected," said Canadian privacy commissioner Jennifer Stoddart.
"We're very pleased Facebook has been responsive to our recommendations."
The decision could also have implications for other social networking websites, she said.
Elliot Schrage, vice president of global communications and public policy at Facebook said he believed the new policies set a new standard for the industry."
There are around 950,000 developers in 180 countries who provide applications for the site.
Specifically, the changes will require applications to state which information they wish to access and obtain consent from the user before it is used or shared.
"Application developers have had virtually unrestricted access to Facebook users' personal information," said Ms Stoddart.
"The changes Facebook plans to introduce will allow users to control the types of personal information that applications can access."
The social network has said work on the changes will begin immediately but they would take around 12 months to implement.