Transgender model Jenna Talackova, 23, was barred from the Canadian round of the contest and is claiming discrimination.
National director Denis Davila said only girls "naturally born female" were allowed, adding: "We embrace diversity. Just because she can't compete doesn't mean we stopped loving her."
Her exit sparked a wave of support with more than 25,000 people signing an online petition calling for her reinstatement.
Talackova vowed to fight the move, made only after she made it to the finals of Miss Vancouver.
She first considered herself female aged four and began hormone therapy at 14. At 19 she went under the knife and had gender reassignment to complete her transformation.
She said: "I will look to turn this situation into a positive so that other people in a similar situation are not discriminated against in the future."
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