Nine members of HMCS Chicoutimi suffered smoke inhalation but no one was seriously injured, the navy said.
``The boat is without power and has only limited means of communicating at this time,'' said Commodore Tyrone Pile, commander of Canadian Fleet Atlantic.
The submarine, which was drifting about 370 kilometres west of Scotland, was also without propulsion from its two diesel-electric engines.
Several fishing vessels were standing by, and a British air force plane was monitoring the submarine's status.
Two British frigates and a tow vessel were headed to the stricken sub, but weren't expected to arrive until Wednesday morning.
Pile said the submarine was on the surface, where chilly temperatures, six-metre waves and 60-kilometre winds ``were creating some discomfort for the crew.''
``The seas are rough and with a submarine on the surface, they're going to have some ... rolling and tossing and being without the power to propel the boat,'' he said at a news conference in Halifax.
When asked if the navy was in any danger of losing the sub and its crew, Pile replied with a curt, ``No.''
Navy officials didn't know what caused the fire, which was contained to an electrical panel in a passageway.
It also wasn't immediately clear if the sub was on the surface or submerged when the fire broke out.
The Canadian navy took possession of the sub, its fourth and final Victoria-class submarine, from the British navy on Saturday.
The fire is the latest in a long list of problems with the used vessels, which were built in the late 1980s and early 1990s, and leased from Britain.
Among other things, some of the subs needed repairs after cracks were found in some valves.
In Ottawa, Defence Minister Bill Graham defended the decision to lease the second-hand subs, saying Canada got a good deal and the boats have performed well.
Pile also brushed off suggestions the 70-metre boats have become a white elephant for the navy.
``This is a small setback,'' he insisted. ``We're going to deal with the fire, find out what caused the problem, and get Chicoutimi over here to continue with the program.''
He said fires and floods are a rare occurrence on a submarine, ``but they do happen and will continue to happen.''
Pile said the submarine has backup batteries and emergency lighting onboard, but no heat.
``It's probably going to get a little cold, but they have sufficient blankets and other means to keep warm,'' he said.
Skippered by Cmdr. Luc Pelletier, the Chicoutimi was to arrive in Halifax harbour on Oct. 18.
It left a British base in Faslane, Scotland, after a renaming ceremony on the weekend as HMS Upholder became HMCS Chicoutimi. It will now be towed back to Scotland for repairs.
Canada's three other diesel-electric submarines are in various stages of repair and upgrading.
The British subs were mothballed in 1994 when Britain decided to stick with an all-nuclear submarine force. A deal to replace Canada's old Oberon-class boats was reached in 1998.
The estimated yearly cost of operating the four submarines has also risen from about $97 million to $121 million.
David Rudd, president of the Canadian Institute of Strategic Studies, said there will be some ``red faces'' in the military and Ottawa over the latest problem with the subs.
``Given the difficulties in bringing the other boats into service, this is not news the navy wants . . . nor does it reflect well on the British,'' he said from Toronto.
But Rudd said even new vessels experience mechanical failures.
``This is not necessarily evidence of negligence, nor is it evidence that we have made a bad choice in purchasing these vessels,'' he said.
