McLachlan was born on January 28, 1968, in Halifax, Nova Scotia, Canada. She was placed with the McLachlan family, which later legally adopted her.
As a child, she was a member of Girl Guides of Canada, participating in Guiding programs.
She played music from a very young age, beginning with the ukulele when she was four. She studied classical guitar, classical piano, and voice at the Maritime Conservatory of Music through the curriculum of The Royal Conservatory of Music. At 17, while she was still a student at Queen Elizabeth High School, in Halifax, she fronted a short-lived rock band called The October Game. One of the band's songs, "Grind," credited as a group composition, can be found on the independent Flamingo Records release Out of the Fog and the CD Out of the Fog Too. It has yet to be released elsewhere.
Following The October Game's first concert at Dalhousie University opening for Moev, McLachlan was offered a recording contract with Vancouver-based independent record label Nettwerk by Moev's Mark Jowett. McLachlan's parents insisted that she finish high school and complete one year of studies at the Nova Scotia College of Art and Design before moving to Vancouver and embarking on a new life as a recording artist. She finally signed to Nettwerk two years later before having written a single song. When she was 19, a mutual acquaintance introduced her to her birth mother. McLachlan did not seek her out and was ambivalent about meeting her.
In 1994, McLachlan was sued by Uwe Vandrei, an obsessed fan from Ottawa, who alleged that his letters to her had been the basis of the single "Possession." The lawsuit was also challenging for the Canadian legal system since Vandrei was an admitted stalker whose acknowledged goal in filing the lawsuit was to be near McLachlan. Consequently, precautions were taken to ensure McLachlan's safety if she had to be in the same location as Vandrei. Before the trial began, however, Vandrei was found dead in an apparent suicide. Vandrei's preoccupation with McLachlan was explored at length in Canadian author Judith Fitzgerald's book, Building a Mystery: The Story of Sarah McLachlan & Lilith Fair.
In 1997, McLachlan married her drummer, Ashwin Sood, in Jamaica. While she was pregnant with her first child, her mother died from cancer in December 2001. While working on her next album, Afterglow, she gave birth to a daughter in Vancouver on April 6, 2002. On June 22, 2007, she gave birth to her second daughter, also in Vancouver. McLachlan announced her separation from Ashwin Sood in September 2008 and they divorced the same year.