The development of carbon (C) and nitrogen (N) simulations is one of the ongoing efforts in the land surface schemes of climate models. The C- and N-coupled Canadian Land Surface Scheme (C-CLASS) was recently modified to better represent grassland ecosystems. Improvements include revised plant growth and senescence calculations that are driven by the plant C balance between fixation and respiration, and leaf-out and leaf-fall schemes that are regulated by the seasonal dynamics of C and N reserves. These revisions were developed to better simulate the stress-related senescence and regrowth of perennials. The model was tested with observations of surface carbon and energy fluxes, soil temperature and moisture, and plant growth during 3 years of declining precipitation at a northern semiarid grassland near Lethbridge, Alberta, Canada. The R2 and standard deviations between the simulated and observed half-hourly fluxes were 0.95 and 22.5 W m−2 for net radiation, 0.82 and 42.1 W m−2 for sensible heat, 0.66 and 29.2 W m−2 for latent heat, and 0.63 and 0.95 μmol C m−2 s−1 for net CO2 exchange. The model and observations both showed a strong impact of declining precipitation on annual carbon budgets in this semi-arid grassland. In a wet year (1998, precipitation = 482 mm), the ecosystem acted as a strong C sink (92 g C m−2modelled and 109 g C m−2 measured from June 20th to December 31st). In a near-normal year (1999, precipitation = 341 mm), a smaller C sink was indicated (24 g C m−2modelled and 21 g C m−2 measured). In a dry year (2000, precipitation = 276 mm), the ecosystem acted as a small C source (−18 g C m−2 modelled and −17 g C m−2measured).