Santos, who has been out since April 21, had been attempting to rehab the injury at the Blue Jays' Minor League complex in Dunedin, Fla. The initial goal was to avoid surgery, but the discomfort didn't subside and he will be forced to go under the knife.
The 29-year-old Santos received the diagnosis after throwing a bullpen session on Saturday and experiencing pain as his level of intensity increased.
"It will be focused around the labrum," Blue Jays manager John Farrell said of the surgery. "Rotator cuff seems to be fine, in tact, completely healthy based on all the MRIs and exams and tests that he has gone through."
Santos began the season as the Blue Jays' closer, but managed to appear in just six games before being placed on the 15-day disabled list. He was acquired during the offseason from the White Sox for pitching prospect Nestor Molina.
Farrell was quick to dismiss any notion that his club received damaged goods in the deal and said Santos didn't experience any issues until his final outing on April 20 in Kansas City.
The Blue Jays are currently in the process of scheduling surgery with Dr. Lewis Yocum. The extent of the injury and rehab won't be known until after the procedure is complete, but the club remains optimistic he will be ready for Spring Training.
"The recovery time was taking longer than normal, so that's initially when we backed him down to address some strengthening issues, or take the approach of rehab and strengthening," Farrell said.
"As he got back through his throwing program, flat ground and long toss -- he felt good in that regard -- but when he gets on the mound with that increased intensity, that's where he feels the discomfort. So that's where the surgery is the next step."
Santos' first season in Toronto officially comes to an end after posting two saves in four opportunities and a 9.00 ERA. He remains under club control through 2017 and has a $9.75 million guaranteed contract with the possibility of earning $29.25 million over that span.
Labrum injuries are often very difficult for pitchers to overcome. Current Blue Jays closer Casey Janssen underwent surgery to repair a torn labrum in 2008 and was forced to miss the entire season. Even when he came back in 2009, he didn't have his typical effectiveness.
It wasn't until he was two years removed from the procedure that Janssen felt he regained his previous form.
"The comeback year is tough," said Janssen, who is a perfect 13-for-13 in save opportunities since taking over the closer's role. "At times, you might show your velocity, but the life and the sharpness wasn't there until that next one.
"Hopefully, that's not the case with Sergio. He has an electric fastball, so he if puts up the velocity number, I'm sure he can get by with not his best stuff."