Benamar Benatta fought to be compensated for spending almost five years in U.S. custody in grim conditions and allegedly being beaten by guards.
Benatta's lawyer, Paul Champ, says terms of the "mutually satisfactory" settlement are confidential.
The arrangement appears to close a little-noted chapter in the story of the Sept. 11, 2001, attacks on New York and Washington.
Benatta defected from the Algerian military while on training in the United States.
In early September 2001, he made his way to the Canadian border at Fort Erie, Ont., where he told officials he intended to claim refugee status.
Canadian authorities drove him over the border one day after the Sept. 11 attacks, handing him to U.S. officials for investigation.
Benatta was cleared of involvement in terrorism by the U.S. Federal Bureau of Investigation two months later. However, he was held in U.S. prisons for close to five years.
Benatta was returned to Canada in 2006 and obtained refugee status the following year. Meantime, he took the federal government to court, alleging breaches of the Charter of Rights and Freedoms and international law.
The Canadian government said it followed the law and argued that Benatta was trying to hold Canada responsible for supposed American misdeeds.
The matter was slated to go to a four-week trial beginning March 30. An agreement to settle was reached last Thursday.
Benatta, now a Canadian citizen, continues to pursue a lawsuit in the U.S. courts concerning his treatment by American officials.
He still suffers from his ordeal but is thankful the case has been resolved, Champ's office said Monday.
Canada is a great country but unfortunately there are many examples where officials have dispensed with human rights in the name of national security, Benatta said in a statement.
"People need to understand a terrible injustice was done to me. I was labelled a terrorist because I happened to be Muslim and had been in the air force. I was simply in the wrong place at the wrong time with the wrong ethnic background," he said.
"That is racial profiling at its worst. These Canadian officials ruined my life without a second thought, and that is really hard to bear."
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