Born on an army base in West Germany in 1956, MacDonald was the daughter of a Lebanese woman and a Canadian soldier of Scottish heritage. She grew up with two sisters and one brother in a strict Catholic family that moved several times before settling in Ottawa, Canada. MacDonald was a high-achieving student, and her parents encouraged her to study law, but instead she left Carleton University in Minnesota to attend the National Theatre School in Montreal. After graduation, MacDonald moved to Toronto and became involved in collaborative theater projects, including This Is for You, Anna (1984). While living in Toronto, MacDonald came out as a lesbian, and her family accepted this fact gradually.
MacDonald's writing career began with projects that included a libretto to the contemporary opera Nigredo Hotel (produced in 1992), but her first solo venture was Goodnight Desdemona (Good Morning Juliet) (1990). The play won the 1990 Governor General's Award for Drama, a Chalmers Canadian Play Award, and the Canadian Authors' Association Award. Her next play, The Arab's Mouth (1995), is set in nineteenth-century Scotland and was less successful than her award-winning first play. During and after this period, MacDonald acted and wrote for television, film, and stage, and she also worked as a broadcast journalist.
MacDonald published her first novel, Fall on Your Knees, in 1996, after five years of work. The story of a family from the island of Cape Breton in Nova Scotia, it delves into the racial and cultural tension on the island in the early twentieth century and then follows one of the principal characters to the jazz scene of Harlem in New York City. The novel was well reviewed and became famous after it was chosen for Oprah Winfrey's book club. MacDonald was awarded the Commonwealth Writers' Prize for Best First Book. She continued to act and write after the success of her novel, appearing in the film Better Than Chocolate in 1999. In 2003, she published her second novel, The Way the Crow Flies, which is based, in part, on the case of Steven Truscott. Truscott was convicted of murder in 1959 but has campaigned to have his name cleared since he was released in 1969. As of 2005, MacDonald continued to live and work in Toronto.