It’s the second blow to Canada's previously untried anti-terror laws, which were enacted after the September 11 attacks in 2001 in the US.
Mohammed Momin Khawaja, a 27-year-old software developer, was the first person charged under the act after his arrest that year.
He’s alleged to have links to a major anti-terror sweep in Britain in 2004 that was said to have averted a major bomb attack.
However in his ruling, Superior Court Justice Douglas Rutherford said Canada's Anti-Terrorism Act defines terrorism by what motivates it, and so wrongly attempts to police people's thoughts, religious beliefs or opinions.
"The Superior Court annulled the definition of terrorist activity ... specifically the provision in the act that requires proof that a person was motivated by ideological, religious or political purpose in the activity for which they've been charged," said justice department spokesman Christian Girouard.
"Essentially, this ruling means there is no (longer a) definition of terrorism," he explained.
The justice department says it will continue its prosecution of Khawaja, who remains in jail.
First terror arrest
The Canadian Muslim of Pakistani descent was arrested at his home in March 2004 and charged with aiding a terrorist group and facilitating terrorist activity in Ottawa and London between November 2003 to March 2004.
His trial is set to begin on January 2 and could last up to three months.
But, University of Ottawa national security expert Wade Deisman said the judge's ruling "may have a hobbling effect on the act" and on prosecutions.
Seventeen others arrested in Toronto in June for allegedly conspiring to bomb public buildings, storm parliament and behead the prime minister, also face terrorism charges. Their fate is now unclear too.
Last week, a judge quashed key parts of Canada's secrecy law used by federal police to obtain a search warrant to scour a reporter's home in January 2004 for evidence of a leak of information in another suspected terror case.
Police were looking for an unnamed source and possible secret documents cited in a November 8, 2003 story on Maher Arar, a Canadian wrongly deported by US authorities to Syria and tortured.