The decision means Zundel must pass muster with the Security Intelligence Review Committee for his 1993 citizenship application to be accepted.
The committee, known as SIRC, previously branded Zundel a Holocaust denier, publisher of hate mail and member of the radical right in its report on the white supremacist group Heritage Front.
Zundel argued the committee, through its Heritage Front investigation, was biased against him and could not dispassionately assess whether he poses a national security risk for purposes of his citizenship bid.
In November, the Federal Court of Appeal asserted that the civilian agency was acting within its mandate and had the unbiased authority to make a recommendation on Zundel.
The Supreme Court, as usual, did not explain its decision Thursday to deny Zundel's appeal.
If Zundel wishes to pursue his citizenship bid, he must now go through the SIRC screening process.
"So it falls back into our court", said committee spokeswoman Claire Malone.
Malone would not say when or whether Zundel will resume his citizenship bid, citing privacy concerns.
Zundel, who lives in Toronto, could not be reached for comment.
In the past, he has contended the Canadian government wants to deny him citizenship so it can deport him to Germany, where he has been convicted under Holocaust denial laws.
A spokeswoman with the Citizenship and Immigration Department said Zundel is not under a deportation order. If his citizenship bid were rejected on security grounds, he would be free to re-apply two years later, she said.
The Citizenship Act has also been amended so that if SIRC did find itself in a position of conflict, a judge could be appointed to assess the security risk of an applicant.