I got the car back last week.
It was indeed a rusted tone ring. The rust expands slightly, contacting the sensor and wearing away its protective covering, which then exposes the electronics in the sensor to the elements.
Here's a picture. You can see the shiny part where the tone ring was striking the ABS wheel sensor with each revolution.
Total damage was around $CAD 1,200 - $800 in parts and $400 labour.
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