The top court ruled Wednesday against Wayne Crookes, a former Green party campaign manager who argued that posting links to sites with defamatory statements was the same as publishing the defamatory material.
The website in question did not reproduce any of the disputed material, nor did it make any comment on it.
In its ruling, the Supreme Court said there is a difference between simply linking to a website and actively encouraging someone to follow a link to a website with defamatory content.
"Making reference to the existence and/or location of content by hyperlink or otherwise, without more, is not publication of that content," the court wrote in its decision.
"Only when a hyperlinker presents content from the hyperlinked material in a way that actually repeats the defamatory content, should that content be considered to be 'published' by the hyperlinker.
"Such an approach promotes expression and respects the realities of the Internet, while creating little or no limitations to a plaintiff's ability to vindicate his or her reputation."
Justice Stephen Kelleher of the B.C. Supreme Court had dismissed Crookes's case, saying the links were like a footnote or a website reference in a newsletter.
Crookes had launched several libel actions against members of the Green Party of Canada, Google, Myspace.com and Wikipedia.
There were concerns that a decision siding with Crookes would have a chilling effect on the web.
"The ruling is a huge win for the Internet," said Michael Geist, a University of Ottawa law professor who holds the Canada research chair in Internet and e-commerce law.
"The Supreme Court of Canada clearly understood the technology, I think they understand the Internet. They, most importantly in this case, understand the direct link — no pun intended — between hyperlinks on the Internet and freedom of expression and the ability to disseminate information."