"As the shelling and bombing in the vicinity of Patrol Base Khiam increased in frequency and accuracy, the decision was made to evacuate," said the report. "But the fatal bomb was dropped before the four observers could be withdrawn."
The heavily censored report said the compound's main building was nearly destroyed by the strikes.
The incident occurred two weeks after reservists Ehud Goldwasser and Eldad Regev were captured and the IDF launched incursions against Hizbullah across the border in Lebanon.
Both the United Nations and Canadian chains of command were aware of the risks of the peacekeeping operation, said the report, but the Canadians deferred to the UN on all tactical decisions.
The board could not assign blame beyond the IDF because neither the United Nations nor the army fully cooperated with the investigation. The IDF provided only an oral summary of its findings that was of limited use, said the board.
The report's 13 recommendations include calls for better communication and situational analysis, but it found no fault with UN command in the area of operations.
"The board's findings and recommendations will improve the safety of the young men and women who proudly wear our uniform. Maj. Hess-Von Kruedener did not die in vain and we shall never forget his ultimate contribution in the pursuit of peace," Canada's chief of defense staff, Gen. Rick Hillier, said in a statement.
Hess-Von Kruedener and the other observers were working as part of Operation Jade on behalf of the UN Truce Supervision Organization.
The Canadian Forces board is an administrative inquiry that examines and reports on significant military events to prevent similar future situations. It is not a criminal investigation.