There was no evidence that Mr Chretien knew about kickbacks organised by a Quebec businessmen involved in his programme to promote national unity in the French-speaking province, Justice John Gomery concluded.
But he must bear political responsibility for the programme which he created. It allowed senior members of his Liberal Party to funnel millions of dollars into their Quebec coffers, Mr Gomery said.
"The public trust ... was subverted and betrayed, and Canadians were outraged, not only because public funds were wasted and misappropriated, but also because no one was held responsible for his misconduct," Mr Gomery said.
The scandal paralysed parliament for months earlier this year. Mr Martin survived a confidence motion by a single vote in May, after he pledged to dissolve the House of Commons and hold new elections after the final Gomery report was released. The second and final report, with recommendations, is due to be released in February.
Mr Martin was "exonerated from any blame for carelessness or misconduct" in the report. The roots of the scandal go back 10 years when a federal advertising programme was set up to restore national unity after Quebec almost won its independence.
The Liberal government's response was to earmark C$100m (£48m) to soothe the angry separatist emotions that flared throughout the country. The campaign included hoisting the national red-and-white maple leaf flag throughout Quebec, among other things.
There was only one problem: the companies that received the money did little or no work. It was the largest cash disappearing act the country had ever seen and it occurred on Jean Chretien's watch.
The Liberal Party has had a virtually hegemonic rule over the country since 1993, but news that millions of dollars had been diverted united opposition parties normally at war and cost the Liberal Party its majority rule. And when the auditor general Sheila Fraser joined the chorus of outrage, Mr Martin called in Mr Gomery to hold an inquiry.
The confessional floodgates burst. In March, Jean Brault from the advertising firm Groupaction Marketing said he was coerced to make back-door donations in exchange for government contracts. He said he paid C$1.2m to Liberal supporters, who essentially did no work.
When the judge accepted Mr Brault's evidence as "credible", the Conservative Party and Bloc Quebecois joined forces to try to topple the government.
Mr Gomery called the scandal a "story of greed, venality and misconduct".
Mr Gomery said that Mr Chretien had ignored warnings and "must share the blame for the mismanagement that ensued".
Mr Chretien has in turn called into question Mr Gomery's credibility.
Mr Martin became involved in the scandal when, as finance minister, he pumped an extra $50m a year into the national unity reserve. but Mr Gomery concluded that Mr Martin was not responsible for keeping tabs on how funds were spent.