The blaze at Allenby Barracks in Bovington, Dorset, in July 2016 caused £400,000 of damage.
A court martial heard Capt Rupert Nurich of the Royals Scots Dragoon Guards was taking part in "improvised gladitorial-style combat".
He was given a severe reprimand.
Ten fire appliances were called to deal with the blaze, which took two hours to extinguish.
The flare was fired as guests gathered around a swimming pool and one shot through an upper window of the seven-storey residential building, setting fire to a room and corridor.
A court martial at Bulford Barricks heard Nurich was experienced in handling pyrotechnics and weapons.
The prosecution argued that because he had drunk two glasses of Pimms and six glasses of wine he should not have fired the flare and was negligent because he was close to buildings.
The officer's barrister, Robert Morris, said what happened was a "freak accident" and the flare had probably veered off course due to a manufacturing fault.
"It was fired in the way you are meant to - away from people and buildings," he said.
The court said it was concerned that "high jinks" involving senior officers had set the tone for the evening.
Nurich was also ordered to pay £10,000 to a civilian steward who lost all her personal possessions in the fire and suffered post-traumatic stress disorder and mild depression as a result.
On the instructions of the Deputy Judge Advocate, Nurich had earlier been found not guilty of arson.
Another Royal Scots Dragoon Guards officer, Lieutenant Tim Carpenter, was found not guilty of arson and not guilty of negligently damaging service property.

A judge made the ruling last month.
A case had been taken by the Northern Ireland Human Rights Commission against the Department of Justice.
The judge said there should be exemptions in the law for women who were the victims of sexual crime and in cases of fatal foetal abnormality.
He said the current legal provisions in Northern Ireland breached the European Convention on Human Rights.
Unlike other parts of the UK, the 1967 Abortion Act does not apply to Northern Ireland, where abortions are illegal except where the life or mental health of the mother is in danger.
Anyone who unlawfully carries out an abortion could be jailed for life.
The judge's ruling did not change the law but had placed an onus on the Northern Ireland Assembly to legislate on the issue.
John Larkin QC, the attorney general, said at the time he was "profoundly disappointed" by the decision and was considering the grounds for appeal.
Amnesty International, the human rights organisation, said it would resist any attempt to overturn the judge's ruling.
Its Northern Ireland director, Patrick Corrigan, said: "The assembly must bring Northern Ireland's abortion laws into the 21st Century and into line with international law as a matter of urgency."
An army officer has been found guilty of negligently damaging service property after firing a flare at a social event, which set fire to a military barracks.
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The attorney general has lodged an appeal to a High Court ruling that found Northern Ireland's abortion legislation to be "incompatible" with human rights law.