Question: Currently I am finishing my masters (one year) in economics at a Canadian university and am intending to apply to Canadian universities to do a PhD. 

The issue I have is that in the courses I had taken last semester the professors were closed to student contact making it near impossible to build relationships. 

For my applications I intended to rely upon professors from my undergraduate university that know me quite well and who I know will write high-quality letters.

A colleague of mine mentioned that when applying for a PhD program, it is expected that my references will come from my masters university and it is generally not acceptable practice to have references from the undergraduate one.

Is this actually the case? If so, what is the best course of action?

Answer: 
A Ph.D. program is about research. Have you done research? If not, how do you know you want to study for a Ph.D.?

It is *your* responsibility to seek out opportunities for research.
Protestations that your professors were not open to communication are not likely to be viewed positively by an admissions committee.
If you've had some research experiences, have you considered asking those you worked with for a recommendation letter? If you haven't had any research experience, that will make it significantly harder to be admitted into a Ph.D. program, no matter who writes your letters.

And if you haven't been inspired to seek out opportunities to get involved in research, that would make me wonder whether you will truly enjoy a Ph.D. program. Going to a Ph.D. program "by default" or because "that's what everyone is doing" is a terrible idea; you should only join a Ph.D. program if you are passionate and excited about doing research, because that's what you are going to be spending most of your time doing in a Ph.D. program, and that is what Ph.D. programs are designed to prepare you for. So, you might also want to do a little bit of soul-searching to figure out whether a Ph.D. program truly is the right direction for you. If it's not, it's much better to find out now rather than after spending several years in a Ph.D. program.

It is acceptable to have letters of reference from a mixture of your undergraduate and your masters university. People would probably ask questions if all of your letters were from your undergraduate university and none were from your masters university. That might make the admissions committee wonder: What were you doing with your time at the M.S. program? Why didn't you seek out opportunities to get involved in research and other activities beyond coursework? Is there some hidden story? (For instance, did you completely alienate all the professors in your M.S. program? Or, do you have little self-drive to do research? Or, maybe you have little experience with research, and thus no idea whether you are good at and enjoy research, and thus little basis to judge whether a Ph.D. program is a good fit for you.)

That said, the most important thing is to have letters from people who know you well, and who know well how to evaluate candidates for Ph.D. programs. So, which professors (or other established researchers) know you well and can best comment on your research ability or research potential?
Not really. It is assumed that if you are a good student you would be able to get good reference letters from your masters courses. It would have to be from your undergraduate thesis advisor or some sort of exceptional activity you did during undergrad, not just a regular class with a good grade, if at all.