Khawaja, a former Ottawa software developer, was originally sentenced to 10 1/2 years in prison after his conviction in 2008, but two years later the Ontario Court of Appeal increased his sentence to life in prison with no parole eligibility for 10 years.
Khawaja's lawyer urged the Supreme Court to overturn that sentence and re-establish the original penalty.
"I am asking court to say this unprecedented increase in sentence was wrong," lawyer Lawrence Greenspon argued before the panel.
"A life sentence in this case is unfit for the offence and the offender."
The Supreme Court will eventually deliver what will likely be a precedent-setting ruling on one of Canada's most high-profile prosecutions under its anti-terrorism act.
Khawaja's appeal is focused on the legal definition of what constitutes "terrorist activity."
Canada's terrorism law, enacted two months after the 9-11 al-Qaida attacks on the United States, includes a controversial section — a so-called motive clause — that requires prosecutors to prove terrorist conduct was performed for political, religious or ideological reasons.
At Khawaja's trial, Justice Douglas Rutherford ruled that the motive provision was unconstitutional, but still ordered the trial to proceed.
In 2010, the appeal court also overturned Rutherford's constitutional ruling, and it increased Khawaja's sentence.
Greenspon argued that the law is unconstitutional because it violates Khawaja's right to express political and religious views. He said the motive clause "will have a chilling effect" on free-speech rights.
But Croft Michaelson, a lawyer with the federal prosecution service, said there has been no evidence produced on that point.
He also argued that the free-speech protections offered under the Charter of Rights and Freedoms are not absolute and do not extend to protecting violence or threats of violence.
The charter guarantees are to "promote and foster dialogue not provide individuals with the means to coerce and intimidate others," Michaelson said.
"Terrorism is distinguished by the fact it is committed for political, religious or ideological purpose."
Khawaja was convicted in 2008 of training at a remote camp in Pakistan, providing cash to a group of British extremists and offences related to building a remote-control detonator.
The prosecution failed to prove Khawaja knew the detonator was to be used to set off a 600-kilogram fertilizer bomb in downtown London. But Greenspon said the appeal court held Khawaja responsible for that offence when it increased its sentence.
Michaelson argued that Khawaja was justly convicted, notwithstanding the striking down of the motive provision at the outset of the trial.
Justice Marshall Rothstein questioned the federal prosecutor over the appeal court's new finding.
"It does seem that, on appeal, the appellant was convicted of an offence for which he wasn't tried ... The trial judge deleted the motive clause," Rothstein said. "We don't usually allow that on an appeal, do we?"
The justices also pressed Michaelson on why a motive clause is necessary in the law.
"Part of the flavour of this is … that this isn't really necessary, that a lot of countries don't have it, so why would you put it in there, this motive clause, unless you really wanted to focus on particular minority, religious groups?" said Chief Justice Beverley McLachlin.
Asked Justice Louis LeBel: "How do you define what is political? What is a political purpose? What's an ideological purpose?"
The high court is also hearing another terrorism case in conjunction with Khawaja's, involving two men wanted in the United States on charges relating to the banned Tamil Tigers organization.
The second terror case before the Supreme Court deals with Suresh Sriskandarajah and Piratheepan Nadarajah, who are wanted in the United States on charges relating to the Tamil Tigers.
The two are challenging their extradition to the U.S., where prosecutors allege they tried to purchase $1-million worth of guns and rockets for the Tigers.
The court reserved judgment Monday after a full day of arguments.
Note to readers: This is a corrected story. An earlier version said Khawaja was the first person to be convicted under Canada's anti-terror law.