The court agreed last February to take the case after federal lawyers argued for guidance on whether CSIS needed a warrant to seek allied help in spying on Canadians abroad.
They said the spy service was left in the dark as to when a judge's approval was required to monitor suspected Canadian extremists in other countries.
But in a recent letter to the Supreme Court, federal lawyer Robert Frater noted Parliament had since enacted changes to the judicial warrant scheme governing CSIS.
"Given the significance of the legislative changes, and CSIS's pressing need to seek warrants under the new regime in fulfilling its statutory mandate, our priority will be to focus on the new system now in place," Frater said in the June 19 letter.
"Accordingly, we now feel it is less important at this time to obtain guidance from this Court on the issue raised in this appeal."
Parliament recently passed Bill C-44, which explicitly allows CSIS to seek a warrant to investigate a security threat beyond Canada's borders. It also approved the controversial C-51 which, among other things, permits the spy service to ask a judge for permission to violate the Charter of Rights.
The government said the two pieces of legislation were needed to fight terrorist threats.
Still, it pushed ahead with the Supreme Court proceeding, saying in a filing with the court that even if C-44 were to become law, important issues would remain unresolved.
In a key 2013 ruling, Federal Court Justice Richard Mosley chastised CSIS over a request for warrants to track two Canadians with help from the Communications Security Establishment, Canada's electronic spy agency.
Mosley said CSIS breached its duty of candour by failing to disclose that CSE's foreign counterparts in the Five Eyes intelligence network — the United States, Britain, Australia and New Zealand — could be called upon to assist.
He also warned that CSIS and CSE were incurring the risk Canadian targets "may be detained or otherwise harmed" as a result of foreign agencies' use of the intercepted communications.
The Federal Court of Appeal upheld Mosley's judgment.
The appeal court declared that a warrant is required when CSIS — either directly or through the auspices of a foreign spy service — uses "intrusive" methods such as interception of telecommunications. It said such warrants could be issued when the interception "is lawful where it occurs."
The government, however, asked the Supreme Court to clarify matters.
With the government now abandoning the case, the court won't have an opportunity to set out "when CSIS is going to need to get these warrants in the first place," said Carmen Cheung, senior counsel at the British Columbia Civil Liberties Association.
It's especially important to have clear overseas warrant rules given the new C-51 powers that allow CSIS to engage in tactics that breach the charter with a judge's consent, she said.
The civil liberties association, environmentalists and human-rights advocates argued against the new spy provisions.
Follow @JimBronskill on Twitter
Also on HuffPost