Desmond's portrait will appear on Canada's 10-dollar bill starting in 2018, replacing the nation's first prime minister John A Macdonald.
Desmond, who died in 1965, was a business woman and beautician who challenged racial segregation at a Nova Scotia movie theater in 1946.
She was jailed, convicted and fined for refusing to leave a lower level whites-only area of the theatre in New Glasgow in Canada's eastern Maritimes region and sit with other blacks in the balcony.
"It's a big day to have a woman on a bank note, and it's a really big day to have my sister on a bank note," Viola's sister Wanda Robson told a press conference.
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Finance Minister Bill Morneau and Bank of Canada Governor Stephen Poloz announced her selection for the 10-dollar bill.
The bank notes are the first in a new series that will reflect themes of social justice and the struggle for rights and freedoms.
The government received more than 26,300 submissions from across Canada after making an open call for nominations last spring, which resulted in 461 eligible candidates.
"Today is about recognizing the incalculable contribution that all women have had and continue to have in shaping Canada's story," said Morneau.
"Viola Desmond's own story reminds all of us that big change can start with moments of dignity and bravery," he said.
"She represents courage, strength and determination -- qualities we should all aspire to every day.