He was educated University of Toronto and Oxford University where he was a member of the Fabian Society. He taught history at the University of Saskatchewan from 1914 until 1927 with a long interruption during World War I when he served as an officer. He also taught from 1927 until 1955 at the University of Toronto. He left the University of Toronto due to a dispute with the administration and later joined the faculty at Carleton University.
During the Great Depression, Underhill joined several other left wing academics in forming the League for Social Reconstruction. He was also a founder of the Co-operative Commonwealth Federation and helped write its Regina Manifesto in 1933. He joined the editorial staff of the leftist Canadian Forum in 1927. Despite these progressive leanings, Underhill had a conservative view of the historical profession and impeded the careers of several women historians.
During World War II, Underhill moved away from socialism and became a left-wing liberal, continentalist. He remained a committed anti-imperialist and was almost dismissed from the University of Toronto in 1941 for suggesting that Canada would drift away from the British Empire and draw closer to the United States. His struggle with the university became a landmark in the history of academic freedom in Canada.
Underhill was a strong supporter of the United States during the Cold War. He also became a supporter of the Liberal Party of Canada, particularly once his long time friend, Lester Pearson joined the government. In his later years, Underhill served as a lecturer and Chair of the Department of History at Carleton University in Ottawa. Carleton University has named a major reading room and the Underhill Graduate Student Colloquium--the longest running graduate colloquium in Canada--in memory of the former Chair.
In 1967, he was made an Officer of the Order of Canada.