In optically complex inland waters, the underwater attenuation of photosynthetically active radiation (PAR) is controlled by a variable combination of absorption and scattering components of the lake or river water. Here we applied a photon budget approach to identify the main optical components affecting PAR attenuation in Lake St. Charles, a drinking water reservoir for Quebec City, Canada. This analysis showed the dominant role of colored dissolved organic matter (CDOM) absorption (average of 44% of total absorption during the sampling period), but with large changes over depth in the absolute and relative contribution of the individual absorption components (water, nonalgal particulates, phytoplankton and CDOM) to PAR attenuation. This pronounced vertical variation occurred because of the large spectral changes in the light field with depth, and it strongly affected the average in situ diffuse absorption coefficients in the water column. For example, the diffuse absorption coefficient for pure-water in the ambient light field was 10-fold higher than the value previously measured in the blue open ocean and erroneously applied to lakes and coastal waters. Photon absorption budget calculations for a range of limnological conditions confirmed that phytoplankton had little direct influence on underwater light, even at chlorophyll a values above those observed during harmful algal blooms in the lake. These results imply that traditional measures of water quality such as Secchi depth and radiometric transparency do not provide a meaningful estimate of the biological state of the water column in CDOM-colored lakes and reservoirs.