US officials deported Arar after the Royal Canadian Mounted Police (RCMP) said he was a suspected Islamic extremist, but an official Canadian inquiry said there was no evidence that he was linked to terrorism.
The deportation has strained diplomatic relations between the USA and Canada.
Stephen Harper, the Canadian prime minister, once again urged Washington to remove Arar from its security watch list as he announced the settlement on Friday.
"On behalf of the government of Canada, I wish to apologise to you, Monia Mazigh [Arar's wife] and your family for any role Canadian officials may have played in the terrible ordeal that all of you experienced in 2002 and 2003," Harper said in a letter of apology which he read at a news conference.
|"There is no amount of money that will compensate me for what myself and my family have gone through"|
In addition to the $8.9m million compensation, a lawyer representing Arar said the government would pay for $847,750 in legal fees.
Arar said afterwards that he could not begin to say how much Harper's statement and the compensation meant.
"In doing so, the government of Canada and the prime minister have acknowledged my innocence. This means the world to me [and my family]," he said.
However, he said: "I have come to believe more and more that I will never, never be able to rebuild the same life I had before ... If there's a way I could buy my life back - that's my biggest wish.
"There is no amount of money that will compensate me for what myself and my family have gone through."
The official inquiry by Justice Dennis O'Connor found that the RCMP had wrongly told US border agents that Arar was a suspected Islamic extremist and strongly criticised the police for incompetence and dishonesty. Canada's most senior RMCP officer resigned last month over the issue.
Harper defended the final settlement, saying: "I know to some Canadians that will sound like an awful lot of money, but I can tell you that the reality is, given the findings of the O'Connor commission and the unjust treatment that Mr Arar received, that figure is within this government's assessment of what Mr Arar would have won in a lawsuit."
In Washington, Patrick Leahy issued a statement saying he was seeking answers as chairman of the senate judiciary committee as to why Arar had been sent to Syria.
|Harper wants Arar removed from a US|
security watch list [AFP]
"The question remains why. Even if there were reasons to consider him suspicious, the US government shipped him to Syria where he was tortured, instead of to Canada for investigation or prosecution," Leahy said.
Edward Markey, a Democrat member of congress, urged the White House to follow the Canadian government’s example.
"The Bush administration should follow suit and admit publicly that it was cruel to detain and transfer Maher Arar to Syria for torture," he said.
US officials have said Arar will remain on their watch list because of unspecified information possessed by law enforcement agencies. Arar is also suing the US for damages.