Matthew tied Mallon at 5-under with a birdie at the 17th and hit an 8-iron to 12 feet at the closing hole. She then rolled in the birdie to take the outright lead.
'Overall I'm pleased with the way I played,' said Matthew, who carded her third straight round of 2-under 70. 'I missed a couple fairways today but still gave myself a lot of chances. Just great to hole two putts on the last two holes and get in with the lead.'
Matthew, part of a three-way tie for first to start the round, struggled early with a bogey at the opening hole. At the fourth, Matthew found a bunker off the tee but managed to knock her second shot on the green within 15 feet of the cup for birdie as the wind that plagued Summerlea Golf & Country Club Friday subsided.
'I think obviously yesterday was the toughest,' said Matthew. 'The first day and today were probably pretty similar. The wind was pretty gusty at times but it was manageable today. I think yesterday it really was tough just for putting and everything, but if it stays like it is today, it's manageable.'
The 32-year-old from Scotland faltered with a bogey at the 12th but two holes later began her strong finish. Matthew reached the green in two at the par-5 14th and two-putted for birdie. At No. 17, she rolled home a 25-footer for birdie and then capped off her round with the birdie at the last.
'There's a lot of good players just kind of lurking behind me. So I'm sure someone will come out and have a low score,' said Matthew, who is seeking her first win since the 2001 Hawaiian Ladies Open. 'I don't know. I think that maybe I need to shoot in the 60s.'
Mallon reached 6-under with a birdie at the 17th but a bogey at the last dropped her to minus-5 and a round of 69. The 13-time winner is seeking her first win since the 2000 du Maurier Classic, the now-defunct LPGA major that was played in Canada.
'This is a real solid round,' said Mallon, who finished tied for eighth at the Women's British Open. 'I had a lot of opportunities for birdies but didn't really putt very well. So that part was a struggle. But as far as hitting the greens, it was a really good day.'
Se Ri Pak shot a 4-under 68 to finish three shots off the lead at 3-under-par 213. The LPGA Championship winner was joined by second-round co-leaders Michelle Ellis and Gloria Park, who struggled with matching 73s.
Karrie Webb, winner of the 2002 Women's British Open last week at Turnberry, carded an even-par 72 to finish alongside Charlotta Sorenstam at 2-under 214.
Michele Redman was alone in eighth place at 1-under 215, while Cristie Kerr, Grace Park and first-round leader Kate Golden shared ninth at even-par 216.
Full-field scores from Womens Canadian Open