The Pennsylvania Avenue Development Corporation, in a major step to implement its long-stalled plans to upgrade the nation's ceremonial thoroughfare, yesterday approved plans by the Canadian government and a local private developer to construct buildings on the avenue.

The action, approved unanimously by the corporation's board of directors, will permit the Canadian government to construct a chancery on the northwest corner of Pennsylvania Avenue and John Marshall Place.The Quadrangle Development Corporation will build a 12-story commercial structure at 13th and E Streets on the Avenue.

Because the site of the proposed chancery is on city-owned land, City Council approval will be necessary before the 165,000-square-foot property can be sold to the Canadian government.

Yesterday's announcement marks the first time that private developers have been granted approval to build on Pennsylvania Avenue since President Carter signed a bill last month appropriating $29 million to the corporation to make street improvements and purchase land.

The Canadian Embassy will break with tradition by moving to a downtown location in close proximity to the White House and the U.S. Capitol. Most foreign missions are located along a strip on Massachussetts Avenue from Sheridan Circle to Belmont Road and in the Kalorama area.

Spokesmen for the corporation and the Canadian Embassy said the purchase price of the land would not be determined until an appraisal is made. The three buildings currently on the site are used by the District government and the United Service Organization (USO) for offices.

"We're going to do something quite distinctive and something which is going to be consistent with the importance of Canadian-American relations," said Robert McGavin, the Canadian Embassy spokesman.

McGavin said that the embassy's 290 employees, now scattered in two buildings on Massachusetts Avenue and one on N Street, will all work in the new chancery. Plans also call for a larger library and reception areas in the new building than currently exist.

In a formal statement, the embassy disclosed it had been consulting with local and federal officials about a possible new site for its chancery since last year. "In view of the favourable reactions received, the Canadian Government considers it timely to state its intentions," the statement added.

Among those approached by the embassy were officials of the city government, members of the Senate and House District Committees, and the Pennsylvania Avenue Development Corporation. In addition, Canadian Ambassador Jack Hamilton Warren met with George M. White, the architect of the Capitol, at the Canadian Embassy on May 13 to discuss the proposal.

The 12-story commercial building planned by the Quadrangle Corporation will feature two floors of retail shopping and a public arcade that will run along 13th Street, according to Rita Abraham, a spokeswoman for the Pennsylvania Development Corporation.

Abraham said the developers hope to attract enterprises such as restaurants and cafes along the arcade to encourage people to come into the downtown area.

The Pennsylvania Avenue Development Corporation hopes to spend $130 million in government money and to attract about $500 million from private developers, according to a spokeswoman.