Her first cinematic appearance was at the age of 4, in the role of Molly in Disney's film One Magic Christmas. At age eight, she was cast in the title role in the television series Ramona , based on Beverly Cleary's books. Though the series lasted but one season, Polley burst into the public eye the following year as Sara Stanley, star of the popular CBC television series Road to Avonlea produced by Kevin Sullivan. The series made her famous and independently wealthy; she was hailed as "Canada's Sweetheart" by the popular press. After seven years with the program, she became irate at what she saw as Disney's interference and Americanization of the series, asked to be written out of the show's plot, and saw her character travel to France to study and disappear from the series. It was only a short time later that the show itself was cancelled, although Polley returned as Sara Stanley for the final episode. At the time she publicly claimed indifference to the show's cancellation.

Her disenchantment with Disney was rooted in an incident during the Gulf War, when she was invited by Disney to appear at a Children's Awards Show in Washington, DC. With the United States still engaged in the Gulf War, 12-year-old Polley wore a peace symbol to the event. After refusing requests from producers to remove it, she was subsequently named on a Disney studio blacklist.

Following the row with Disney, Polley dedicated more of her energy to left-wing politics, becoming a prominent member of the New Democratic Party, where maverick Ontario legislator Peter Kormos was said to be her political mentor. Independently wealthy by the age of 14, in 1993, the young maverick left home to live with a man nearly 20 years her senior in her own house. (Of the situation, she now says her father probably should have stopped her, since the arrangement was patently illegal.)

In 1995, she lost several teeth to riot police while protesting against the Provincial Conservative government of Mike Harris in Queen's Park, Toronto. Not wanting to be seen stealing the spotlight, she has recently scaled back on her political activism, but remains one of the most engaged young actors in North America.

After the Toronto incident she returned to acting and her role in The Sweet Hereafter (1997) brought her first considerable attention in the United States. She became a fan favorite at the Sundance Film Festival. She was cast in the role of Penny Lane in Almost Famous, but she dropped out of the project to return to Canada for the low-budget The Law of Enclosures.

She reportedly had affairs with older men, including co-star Stephen Rea and director Michael Winterbottom, for whom she left her longtime companion, editor David Wharnsby. The couple eventually was reunited after her affair with Winterbottom.

In 2003, she was part of newly-elected Toronto mayor David Miller's transition advisory team, and that September she married Wharnsby, with whom she had been involved a total of seven years.

It was announced in 2006 that she is directing her first feature-length film, Away From Her, based on the Alice Munro short story The Bear Came Over the Mountain.