Tilly, the third of four children, was born Margaret E. Chan in Long Beach, California, the daughter of Patricia Tilly, a schoolteacher, and Harry Chan, a Chinese American used car salesman. Following her parents' divorce when she was three, she was raised by her mother and stepfather, John Ward, in British Columbia, Canada. Tilly graduated from Esquimalt High School in Victoria, British Columbia. She has two sisters: Rebecca, and actress Jennifer Tilly (born 1958).
Tilly won a Golden Globe and was nominated for the Best Supporting Actress Oscar for the portrayal of Sister Agnes in Agnes of GodAs a teen, she was involved with the Connecticut Ballet Company, as well as the Throne Dance Theatre, and made her screen debut with Alan Parker's Fame in 1980.
After a serious back injury forced her to give up dance she became an actress. She appeared in films such as The Big Chill and Psycho II before her acclaimed title role in Agnes of God, for which she was nominated for an Oscar and won a Golden Globe. Tilly later appeared in Valmont, The Two Jakes with Jack Nicholson and Leaving Normal, as well as Body Snatchers.
Tilly was the first choice for the role of Constanze Mozart in Milos Forman's film Amadeus, having received glowing appraisals of her rehearsal work by both her would-be costar Tom Hulce and director Forman. However, she sustained a serious leg injury playing soccer with some local children and was forced to drop out. The role later went to Elizabeth Berridge.
Tilly has written a novel entitled Singing Songs, comprising a series of vignettes about a young girl whose stepfather molests her and her sisters. A second novel, Gemma, came out in October 2006. Her third novel, Porcupine, is a finalist for the Sheila A. Egoff Children's Literature Prize.
According to Tilly's book Singing Songs, which she later confirmed was autobiographical, her mother was a very unorthodox parent. The book also alleges that she was sexually abused by her stepfather.
Tilly has three children: Emily (born 1984) and David (born 1986), by her marriage to film producer Tim Zinnemann, which ended in 1989, and a son, Will (born 1990), from her five-year relationship with British actor Colin Firth. Her second husband, John Calley, was 30 years her senior. He is a former president of Sony Pictures; they were married in 1995 and divorced in 2002.
Now remarried and living in British Columbia, Tilly has not appeared in a film since 1995, having decided to retire from acting in order to raise her children and write.