diff --git a/cli/src/cli_util.rs b/cli/src/cli_util.rs
index bbcd4d0ab..7b0ad7e96 100644
--- a/cli/src/cli_util.rs
+++ b/cli/src/cli_util.rs
@@ -1671,19 +1671,18 @@ fn is_colocated_git_workspace(workspace: &Workspace, repo: &ReadonlyRepo) -> boo
     let Some(git_backend) = repo.store().backend_impl().downcast_ref::<GitBackend>() else {
         return false;
     };
-    let Some(git_workdir) = git_backend
-        .git_workdir()
-        .and_then(|path| path.canonicalize().ok())
-    else {
+    let Some(git_workdir) = git_backend.git_workdir() else {
         return false; // Bare repository
     };
-    // Colocated workspace should have ".git" directory, file, or symlink. Since the
-    // backend is loaded from the canonical path, its working directory should also
-    // be resolved from the canonical ".git" path.
+    if git_workdir == workspace.workspace_root() {
+        return true;
+    }
+    // Colocated workspace should have ".git" directory, file, or symlink. Compare
+    // its parent as the git_workdir might be resolved from the real ".git" path.
     let Ok(dot_git_path) = workspace.workspace_root().join(".git").canonicalize() else {
         return false;
     };
-    Some(git_workdir.as_ref()) == dot_git_path.parent()
+    git_workdir.canonicalize().ok().as_deref() == dot_git_path.parent()
 }
 
 pub fn start_repo_transaction(
diff --git a/cli/tests/test_init_command.rs b/cli/tests/test_init_command.rs
index 3e558ec5c..465b9edcd 100644
--- a/cli/tests/test_init_command.rs
+++ b/cli/tests/test_init_command.rs
@@ -297,13 +297,10 @@ fn test_init_git_colocated_symlink_directory_without_bare_config() {
     git_repo.config().unwrap().remove("core.bare").unwrap();
     std::fs::rename(workspace_root.join(".git"), &git_repo_path).unwrap();
     std::os::unix::fs::symlink(&git_repo_path, workspace_root.join(".git")).unwrap();
-    // FIXME: Working copy shouldn't be updated
     let (stdout, stderr) = test_env.jj_cmd_ok(&workspace_root, &["init", "--git-repo", "."]);
     insta::assert_snapshot!(stdout, @"");
     insta::assert_snapshot!(stderr, @r###"
-    Working copy now at: sqpuoqvx f6950fc1 (empty) (no description set)
-    Parent commit      : mwrttmos 8d698d4a my-branch | My commit message
-    Added 1 files, modified 0 files, removed 0 files
+    Done importing changes from the underlying Git repo.
     Initialized repo in "."
     "###);
 
@@ -315,12 +312,12 @@ fn test_init_git_colocated_symlink_directory_without_bare_config() {
     ~
     "###);
 
-    // FIXME: Check that the Git repo's HEAD moves
+    // Check that the Git repo's HEAD moves
     test_env.jj_cmd_ok(&workspace_root, &["new"]);
     let stdout = test_env.jj_cmd_success(&workspace_root, &["log", "-r", "@-"]);
     insta::assert_snapshot!(stdout, @r###"
-    ◉  sqpuoqvx test.user@example.com 2001-02-03 04:05:07.000 +07:00 f6950fc1
-    │  (empty) (no description set)
+    ◉  sqpuoqvx test.user@example.com 2001-02-03 04:05:07.000 +07:00 HEAD@git f61b77cd
+    │  (no description set)
     ~
     "###);
 }
diff --git a/lib/src/git_backend.rs b/lib/src/git_backend.rs
index 47866e5dd..c7f8dc06d 100644
--- a/lib/src/git_backend.rs
+++ b/lib/src/git_backend.rs
@@ -17,10 +17,10 @@
 use std::any::Any;
 use std::fmt::{Debug, Error, Formatter};
 use std::io::{Cursor, Read};
-use std::path::Path;
+use std::path::{Path, PathBuf};
 use std::process::ExitStatus;
 use std::sync::{Arc, Mutex, MutexGuard};
-use std::{fs, str};
+use std::{fs, io, str};
 
 use async_trait::async_trait;
 use gix::objs::{CommitRefIter, WriteTo};
@@ -185,7 +185,7 @@ impl GitBackend {
     ) -> Result<Self, Box<GitBackendInitError>> {
         let canonical_git_repo_path = {
             let path = store_path.join(git_repo_path);
-            path.canonicalize()
+            canonicalize_git_repo_path(&path)
                 .context(&path)
                 .map_err(GitBackendInitError::Path)?
         };
@@ -240,8 +240,7 @@ impl GitBackend {
                 .context(&target_path)
                 .map_err(GitBackendLoadError::Path)?;
             let git_repo_path = store_path.join(git_repo_path_str);
-            git_repo_path
-                .canonicalize()
+            canonicalize_git_repo_path(&git_repo_path)
                 .context(&git_repo_path)
                 .map_err(GitBackendLoadError::Path)?
         };
@@ -368,6 +367,21 @@ impl GitBackend {
     }
 }
 
+/// Canonicalizes the given `path` except for the last `".git"` component.
+///
+/// The last path component matters when opening a Git repo without `core.bare`
+/// config. This config is usually set, but the "repo" tool will set up such
+/// repositories and symlinks. Opening such repo with fully-canonicalized path
+/// would turn a colocated Git repo into a bare repo.
+fn canonicalize_git_repo_path(path: &Path) -> io::Result<PathBuf> {
+    if path.ends_with(".git") {
+        let workdir = path.parent().unwrap();
+        workdir.canonicalize().map(|dir| dir.join(".git"))
+    } else {
+        path.canonicalize()
+    }
+}
+
 fn gix_open_opts_from_settings(settings: &UserSettings) -> gix::open::Options {
     let user_name = settings.user_name();
     let user_email = settings.user_email();