Born and raised in the Toronto suburb of Scarborough, Gibson began writing in the early 1970s to document her struggle with mental illness. Biographical references are, however, in conflict as to whether Gibson suffered from schizophrenia or bipolar disorder.

Gibson was married in the early 1970s to Stuart Gilboord, with whom she had one son, Aaron. Following her divorce from Gilboord, Gibson moved in with her longtime friend Craig Russell.

Gibson published her debut short story collection, The Butterfly Ward, in 1976. The book included the story "Making It", based on her experiences living with Russell, which was later made into the feature film Outrageous! by director Richard Benner. Hollis McLaren played "Liza Conners", the fictionalized version of Gibson, in that film. Benner also produced a sequel, Too Outrageous!, ten years later.

"Ada", another story in the collection, was the basis of a CBC Television movie directed by Claude Jutra. It was Jutra's first English-language film production.

The Butterfly Ward was a winner of the City of Toronto Book Award in 1977, shared with Margaret Atwood's novel Lady Oracle.

Gibson published three further collections of short stories before releasing her first novel, Opium Dreams, in 1997. Opium Dreams was a winner of the Books in Canada First Novel Award, and Gibson subsequently published one more book.

Later Gibson lived with and shared a house with Juris Rasa, her second husband, and her cat Garbo. Gibson died in 2006 of breast cancer, aged 57.

Her friend Stephen Jon Postal and his wife Guia Dino Postal chronicled Gibson's teenage life in the novel, Of Margaret and Madness: A Novel Inspired By True Events (ISBN 9781434332752).

A made-for-TV-film, For the Love of Aaron, was produced in 1994 about her custody battle for her son, Aaron with her ex-husband, Stuart Gilboord; Margaret Gibson was portrayed by actress Meredith Baxter.