Among the significant changes, Mohamed Mahjoub will no longer have to wear a tracking device and will be able to use the subway.
He'll also be able to use the Internet and a cellphone, although security authorities will be able to monitor his computer and phone usage at any time.
"There is a basis upon which to maintain a finding that Mr. Mahjoub poses a threat to the security of Canada," Justice Edmond Blanchard said in his ruling dated Monday.
"I am also satisfied that the threat posed by Mr. Mahjoub ... is now significantly diminished."
Mahjoub, 52, a father of three, has been fighting government allegations — based in large part on secret evidence he has not been allowed to see — that he was a ranking member of a terrorist group in Egypt.
He has been under a national security certificate, which allows for indefinite detention without charge, and has been in jail or under house arrest since 2000 while the government tries to deport him to Egypt.
In an interview, Mahjoub said he was "absolutely very pleased" by the change to his bail conditions.
"It's amazing in my opinion," said Mahjoub, who has always denied any links to terrorism.
Blanchard, who has yet to rule on whether the government has violated Mahjoub's rights or whether the national security certificate is reasonable, found there was no longer a need for surveillance equipment inside his home.
Mahjoub can also move house without government approval but must still tell authorities in advance where he is going before leaving the Toronto area.
The change of release conditions will take effect in about two weeks to allow details to be worked out.
Mahjoub said the decision shows the government has no concrete evidence that he poses a serious threat, but said he still has concerns about the remaining conditions.
Those include having to visit the Canada Border Services Agency once a week.
One of Mahjoub's lawyers, Yavar Hameed, said the changes show the "utter disproportionality and arbitrariness" of the bail conditions imposed on his client.
His supporters also hailed Blanchard's ruling.
"The judge is clearly signalling that he no longer buys the government's bogeyman story about Mohamed," Victoria Barnett, a Mahjoub activist, said in a statement.
During a series of court hearings over the past year, the government has admitted that most information against Mahjoub comes from sources known to use torture.
Ottawa was forced to withdraw evidence used against him because Canada's spy agency destroyed original records. The government also mistakenly took files from a courtroom that belonged to Mahjoub's lawyers.
Mahjoub, who came to Canada as a refugee in the mid-1990s, faces no charges in Egypt. He has fought deportation saying he would likely be tortured if sent there.