Daniel James Clayton was convicted in March of possessing, accessing and distributing child pornography and was sentenced to three years in federal prison.
Some of the 4,600 computer images showed aggravated sexual assault and violence involving men and babies.
The Crown had wanted a five to six-year jail term and appealed the sentence handed down in May by Court of Queen's Bench Justice Kristine Eidsvik.
In a ruling released Tuesday, Appeal Court Justices Constance Hunt and Ronald Berger dismissed the challenge, saying that while the trial judge could have imposed a longer sentence, she did not make any legal mistakes.
"Although she might have imposed a heavier sentence, we are not persuaded that the sentence she imposed was demonstrably unfit."
In a dissenting judgment, Justice Bruce McDonald wrote that Clayton deserved an eight-year sentence.
He said that innocent victims of child pornography are seriously and often irrevocably damaged for life due to the trauma they suffer and distributing such images creates a greater demand for "vile filth."
"To my mind, it is high time that courts do their part to try and eliminate or largely reduce the existence of this blight."
Clayton, 30, is a decorated former British soldier who owned a security consulting company.
Court heard from a Toronto Police undercover officer who testified that he had an online chat with someone whose online name was ``Into Taboo'' who was looking to trade images of children as young as three months involved in sex acts.
Court heard that Clayton chatted online with at least 213 people on 34 different days about pornography preferences, including undercover officers.
The detective testified he traced the computer IP address to a home in Calgary and notified police in the city.
At his trial, Clayton's lawyer said his client had nothing to do with the pornographic images and suggested that a computer virus may be to blame
Upon his release from prison, Clayton will have to stay away from areas where children play and not talk to anyone under the age of 16 on a computer.
Clayton served with the British military in Iraq and Afghanistan and was injured during his service by a roadside bomb.