Felicia Boots, 35, admitted she killed 14-month-old Lily and 10-week old Mason in southwest London.
"Not guilty to murder, but guilty to manslaughter because of diminished responsibility," Boots told the court before she wiped away tears, London24 reports. Her husband, Jeff, was also reportedly in court.
The Crown dropped the murder charges.
Boots' husband Jeff, also a Canadian resident and former investment banker with the Bank of Montreal, found the children dead at the family's upscale home May 9. Autopsies determined the children were suffocated.
The couple moved from Canada to the UK several years ago. Boots worked in Canada as a hairdresser and operated a home-based jewelry studio out of her London home. Boots' parents live in Oakville, ON, neighbours of her parents told the U. Telegraph.
Boots is being held at a psychiatric centre, and media reports suggest she may have suffered from postpartum depression.
"This plainly is a tragic case," Crown prosecutor Edward Brown told the court, BBC reported.