It can be imported (not illegal) but, like patski said, the import tax on it is up to 300%. Since no one would pay you the $16 you'd need to charge for a $4 half pound of butter just to cover the cost of bringing it in to the country, it's not worth it to anyone to import it.
The regulations in place regarding dairy products were created to protect the interests of Canadian dairy producers. Unfortunately, there are also regulations over weird things like the max milk fat percentage butter can have, which is lower than butter found elsewhere, like Europe.
You also won't find any butter labeled as grass-fed because producers simply can't let their cattle graze year round if the grazing lands are covered in snow. As soon as they supplement the cow's diet with some other kind of feed, they can't say it's grass fed anymore. There's some good info on the Organic Meadow website: Organic Meadow - Why Organic? » FAQs
Yes, I get that it's a bit odd I took the time to find out this much info about goddamn butter
Pretty cool actually. Dad told me that regulations had to do with the type of butter allowed, but he couldn't tell me that they specifically governed the fat content. Le sigh. Canada does suck sometimes.