Cellulose nanocrystals (CNCs), produced from dissolving wood pulp, were chemically functionalized by transesterification with canola oil fatty acid methyl ester (CME). CME performs as both the reaction reagent and solvent. Transesterified CNC (CNCFE) was characterized for their chemical structure, morphology, crystalline structure, thermal stability, and hydrophobicity. Analysis by Fourier transform infrared (FTIR) and FT-Raman spectroscopies showed that the long chain hydrocarbon structure was successfully grafted onto CNC surfaces. After transesterification the crystal size and crystallinity of nanocrystals were not changed as determined by Raman spectroscopy and wide angle X-ray diffraction (XRD). CNCFE showed higher thermal stability and smaller particle size than unmodified CNCs. Water contact angle measurement indicated the CNCFE surface has significantly higher hydrophobicity than unmodified CNCs. The transesterified CNCs could be potentially used as hydrophobic coatings and reinforcing agents to hydrophobic polymer for nanocomposites.