Justice John Rooke dismissed an application from Khadr's lawyer that his 27-year-old client be moved out of the Edmonton Institution.
Dennis Edney had argued that his client should be treated as a young offender and be moved out of maximum security.
"Mr. Khadr's placement in a federal penitentiary is lawful and the ... application is denied," Rooke wrote in his decision released Friday.
The Toronto-born Khadr pleaded guilty in 2010 to five war crime offences, including murder, for killing an American soldier in Afghanistan when he was 15.
A U.S. military commission sentenced him to eight years, but did not specify if it was a youth or adult sentence.
Khadr was transferred to Canada from Guantanamo Bay last fall.
Edney had argued that an eight-year sentence for the murder and four other crimes only made sense as a youth sentence.
But the federal government argued that Khadr was given eight years as a youth for murder and the sentences on the four remaining offences were to be served concurrently as an adult.
Rooke agreed that Khadr was sentenced as a youth on the murder charge and as an adult on the four other charges. The issue then became where best to serve the sentence.
"Mr. Khadr obviously cannot be in an adult provincial facility for adults and a penitentiary at the same time," Rooke wrote.
"Therefore, the question is where is the offender sentenced to youth and adult sentences to serve that sentence?"
Given that part of Khadr's sentence is being served as an adult, Rooke found placement in a penitentiary is lawful.
Edney said his client will appeal.
"It boils down to the judge's version of the statutory interpretation of Section 20 of the International Transfer of Offenders Act and ours," Edney said in a phone interview.
"We say that Omar Khadr's eight-year sentence could only have been a youth sentence had those offences been committed in Canada. This judge disagrees. And so we will take that argument to the Court of Appeal and let the Court of Appeal make that determination on whether he is right or whether we are right."
The federal government welcomed the ruling.
"Omar Ahmed Khadr pleaded guilty to heinous crimes, including the murder of American Army medic Sgt. Christopher Speer," Public Safety Minister Steven Blaney said in an email from Ottawa. "The government of Canada will continue to vigorously defend against any attempt to lessen his punishment for these crimes."
The federal government has insisted that Khadr is a dangerous terrorist who deserves to be treated as such. It blocked a request by The Canadian Press earlier this year to interview him.
In September 2012 he was transferred to Canada to serve the remainder of his sentence. He was first incarcerated largely in isolation at the maximum security Millhaven Institution in Ontario before moving to Edmonton in May.
Khadr was eligible for full parole in July, but hasn't applied.
Edney said, because Khadr has been so isolated, he hasn't been eligible for prison programs and that's what he needs for release on parole.
Khadr's warrant expiry date — the last day of his sentence — is Oct. 30, 2018.
Alex Neve, secretary general of Amnesty International Canada, said he was deeply disappointed with the court ruling.
Neve said after more than a year in Canada, corrections officials should have taken steps to ensure that Khadr is treated according to international legal standards meant to protect and rehabilitate child soldiers.
He said justice has not been served in Khadr’s case and his rights continue to be ignored and violated.
"Granting this court application could have been a significant step towards righting those wrongs," Neve wrote in an email.
"Amnesty International continues to remind the Canadian government of its obligations under international human rights standards dealing with child soldiers and calls on authorities to take immediate steps to ensure that he is treated in full conformity with those important obligations."
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