Oh no, how tragic for everyone involved!
I'm surprised that bylaw has seized your dog though. As bad as I feel for the cat, that's the risk people take when they let their cats roam at large. It seems people tend to forget that they are still a prey animal, and that most dogs will give chase if the opportunity presents itself. I can't see how the bylaw folk can do anything to your dog based on the fact that it was doing what comes naturally. Hopefully they will be fair and rational in their assessment and this is all just a formality due to that other person's complaint. Can the neighbor who's cat it was come to your defense in court?