The Federal Appeal Court has ruled against the Conservatives in the so-called "in and out" financing case, in which cash was transferred between local Tory riding associations and the national party during the 2006 election.

Elections Canada says the Conservative Party of Canada violated campaign financing rules by moving $1.3 million in and out of 67 ridings to pay for national ads. The manoeuvres allowed the party to exceed the campaign spending limits and allowed candidates to claim rebates on expenses that weren't actually incurred, the agency said.

The ruling Conservatives won a lower court case on the rebates issue last year, but Elections Canada appealed.

In its decision released Tuesday, the Federal Appeal Court said it was reasonable for the elections watchdog to be dissatisfied with the way the Conservatives reported national advertising expenses.

A spokesman for the elections watchdog said "the decision preserves the integrity of the political financing regime which ensures fairness in the electoral system."

Conservative MP Pierre Poilievre told CBC-TV's Power & Politics with Evan Solomon that the party intends to appeal the decision.

"We believe we are in a very strong position to defend ourselves," he said.

Such rulings cannot be automatically appealed to the Supreme Court of Canada; the party must seek leave to appeal.

Reacting to the decision, Liberal MP Ralph Goodale said "the Conservative position is now almost laughable. Their last fig leaf has been swept away and they're totally exposed without any defence."

The ruling was unanimous by the three-judge panel, he added.

"It'll be an interesting question as to whether or not the Conservative government will get leave to appeal," he said.

NDP MP David Christopherson said the ruling represents a huge problem for the Conservatives, "putting the government into serious legal hot water."

The government faces potential fines or jail time, the opposition MPs said.

The Conservatives have insisted the controversy is merely a difference of interpretation of the rules that were changed by Elections Canada after the election.

Prime Minister Stephen Harper has said the party has since changed its practices to conform to the new rules. But opposition parties have accused the Conservatives of undermining democracy by playing fast and loose with election laws.

Late last week, Elections Canada charged the party and four of its top campaign and fundraising officials, including Senators Doug Finley and Irving Gerstein, with wilfully overspending against. The charges are regulatory, not criminal.

With files from The Canadian Press