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The hydrological cycle has significant effects on the terrestrial carbon (C) balance through its controls on photosynthesis and C decomposition. A detailed representation of the water cycle in terrestrial C cycle models is essential for reliable estimates of C budgets. However, it is challenging to accurately describe the spatial and temporal variations of soil water, especially for regional and global applications. Vertical and horizontal movements of soil water should be included. To constrain the hydrology-related uncertainty in modelling the regional C balance, a three-dimensional hydrological module was incorporated into the Integrated Terrestrial Ecosystem Carbon-budget model (InTEC V3.0).We also added an explicit parameterization of wetlands. The inclusion of the hydrological module considerably improved the model’s ability to simulate C content and balances in different ecosystems. Compared with measurements at five flux-tower sites, the model captured 85% and 82% of the variations in volumetric soil moisture content in the 0–10 cm and 10– 30cmdepths during the growing season and84%of the interannual variability in the measuredCbalance. The simulations showed that lateral subsurface water redistribution is a necessary mechanism for simulating water table depth for both poorly drained forest and peatland sites. Nationally, soil C content and their spatial variability are significantly related to drainage class. Poorly drained areas are important C sinks at the regional scale, however, their soil C content and balances are difficult to model and may have been inadequately represented in previous C cycle models. The InTEC V3.0 model predicted an annual net C uptake by Canada’s forests and wetlands for the period 1901–1998 of 111.9 Tg C yr-1, which is 41.4 Tg C yr-1 larger than our previous estimate (InTEC V2.0). The increase in the net C uptake occurred mainly in poorly drained regions and resulted from the inclusion of a separate wetland parameterization and a detailed hydrologic module with lateral flow in InTEC V3.0.