The decision to send the film, about the plight of the widows in India in the early 1930s, was announced by Telefilm Canada.
Water, which is basically made in Hindi with some passages in English, stars John Abraham, Lisa Ray and Seema Biswas. It was the official opening night film at the 2005 Toronto Film Festival.
Mehta initially started filming it with Shabana Azmi in Varanasi, but could not continue because of protests and attacks from Hindu fundamentalists.
She later shot the film in Sri Lanka.
"Water" marks the final instalment of her elemental trilogy about women's rights in her home country India. The series started with "Fire" and "Earth". All are Canada-India co-productions with the Canadian government as the primary partner.
A special Oscar committee will now screen "Water" and 82 other entries to determine the five nominees. Only three Canadian films, all by Montreal's Denys Arcand, have ever been nominated in this category.
Arcand's "The Barbarian Invasions" became the first Canadian winner in 2004.