The case involved Ved Dhingra, who killed his wife Kamlesh in 2006 but was found not criminally responsible due to a mental disorder.
While the court agreed with the province's argument that the life insurance payout claimed by Dhingra was proceeds of unlawful activity, it found it would not be just for Dhingra to forfeit the funds and consequently dismissed the Attorney General's application.
Ontario's Attorney General had invoked the Civil Remedies Act to lay claim to $51,000 awarded to the now 72-year-old Dhingra.
The Civil Remedies Act, enacted in 2002, aims to compensate victims of crime and prevent criminals and others from profiting from wrongdoing. It specifically does not exempt a person found not criminally responsible on account of mental disorder.
The province's application to Superior Court came after Ontario's top court had ruled last April that the Toronto man could collect on the policy because he was found not criminally responsible for bludgeoning and stabbing his long-estranged wife to death.
A Superior Court decision delivered on Tuesday found there was no evidence that the possible availability of a life insurance payout played any role in Dhingra's conduct.
"I fail to see how the granting of the order would serve to deter others in any general sense from doing what Dhingra did," wrote the presiding judge, adding that Dhingra's personal circumstances could be taken into account.
Dhingra — now an elderly psychiatric patient subsisting on government pension and old age security payments — suffered from a mental disorder for years and was found not criminally responsible for his wife's death in 2008.
He had purchased the life insurance policy for his wife in 1998.
According to details laid out in court documents, Dhingra began to show signs of escalating mental illness in 1988 and separated from his wife in 1993.
In 2005 he was found naked in the middle of a Toronto street and was taken to a mental health centre where it was determined that he had been schizophrenic for years.
In June 2006, after being released from hospital for treatment of a severe, self-inflicted wound, he stayed with his wife. Days later, he killed her by first smashing her head numerous times with a white religious statue and then stabbing her 24 times in the neck and torso.
Dhingra then overdosed on several medications himself but was later revived.
After being found not criminally responsible for his wife's death, Dhingra entered a mental health centre and was released into the community in 2011 before claiming the insurance policy money.
The judge has crafted "a very smart and concise judgement here," said Eric M. Wolfman, Dhingra's lawyer. "Hopefully this is the end of the matter."
A spokesman for the Attorney General said the court's decision is being reviewed the ministry will not be commenting further as the matter is within the 30-day appeal period.