Immunosuppressive cells in the tumor microenvironment allow cancer cells to escape immune recognition and support cancer progression and dissemination. To improve therapeutic efficacy, we designed a liposomal oxaliplatin formulation (PCL8-U75) that elicits cytotoxic effects toward both cancer and immunosuppressive cells via protease-mediated, intratumoral liposome activation. The PCL8-U75 liposomes displayed superior therapeutic efficacy across all syngeneic cancer models in comparison to free-drug and liposomal controls. The PCL8-U75 depleted myeloid-derived suppressor cells and tumor-associated macrophages in the tumor microenvironment. The combination of improved cancer cell cytotoxicity and depletion of immunosuppressive populations of immune cells is attractive for combination with immune-activating therapy. Combining the PCL8-U75 liposomes with a TLR7 agonist induced immunological rejection of established tumors. This combination therapy increased intratumoral numbers of cancer antigen-specific cytotoxic T cells and Foxp3-T helper cells. These results are encouraging toward advancing liposomal drug delivery systems with anticancer and immune-modulating properties into clinical cancer therapy.