Mustafa Tamimi, 28, was struck in the head by the canister while chasing an army jeep during a stone-throwing demonstration in the Israeli-occupied West Bank. Images showed one of the jeep's rear doors slightly ajar with smoke coming out of it as Mr Tamimi collapsed on the road.
The death deepened bitterness among Palestinians who, after years of armed conflict, say their less violent struggle for statehood still meets excessive, sometimes lethal, Israeli force.
In a statement, the army said an internal investigation had found the soldier who shot the canister "did not see any people in the line of fire" and that therefore none of the soldiers involved were criminally liable.
The inquiry was impeded, the army said, by the refusal of one of Mr Tamimi's fellow protesters - whom it did not name - to testify, and by "violent riots" at the scene as investigators tried to carry out forensic work.
The army's account was rejected by Mr Tamimi's brother Louai, who said he had not been approached by investigators despite having witnessed the shooting.