The club placed the 32-year-old forward on injured reserve Thursday for the rest of the season. Gillis said he made the move to preserve Malhotra's long-term health because Malhotra remains vulnerable to a serious injury.
The GM added the door is closed to a possible return in the playoffs.
Malhotra is in the final year of a three-year contract that he signed after joining the Canucks as a free agent from the San Jose Sharks. Pending a new deal with another club, his career could be finished.
"For me, it's the hardest thing I've had to do in this job," said Gillis during a news conference at Rogers Arena.
"It's, basically, a situation that changed Manny's life in a half-a-second play, and watching what he did to try and recover from that, and the difficulty of it, it was a very difficult decision for me to make — and one that I've thought about for some time.
"It wasn't done on the spur of the moment at all."
In March 2011, Malhotra suffered a serious eye injury when struck by a puck during a game versus Colorado. The full extent of the injury was not disclosed, but he underwent a series of surgical procedures in the summer of 2011.
The Mississauga, Ont., native made a valiant return for the 2010-11 Stanley Cup finals, but struggled last season. Malhotra and the club hoped he would bounce back this season, because he had a full summer in which to train.
But he had no points in nine games this season after managing just 18 in 2011-12.
Gillis said he expressed his concerns to Malhotra at the end of last season and wanted to give him 10 games this season to prove that he was at less risk. The GM said there was no "discernible change" in Malhotra's risk level, and there were times when the player was "extremely vulnerable."
"In my opinion, it didn't get worse, but there wasn't the type of change necessary for him to not be at a much higher risk than everybody else out on the ice," said Gillis.
Malhotra has not practised or played this week. Coach Alain Vigneault said he missed practice Monday because he was taking a "personal day," and he did not play in Vancouver's 2-1 win over Minnesota on Tuesday night for what the team said was "a personal matter.''
Malhotra was chosen seventh overall by the New York Rangers in the 1998 NHL entry draft. In addition to the Rangers, Canucks and Sharks, he has played for the Dallas Stars and Columbus Blue Jackets.
He has compiled 108 goals and 170 assists in 864 NHL regular-season games. He has two points in 35 playoff contests.
"There are times when hockey is a secondary idea behind long-term health," said Gillis. "These are really difficult decisions for all of us.
"It's going to be difficult for Manny. It is difficult for him. But I took (the decision to stop playing) out of his hands — and I wasn't going to move forward the way it was going."
Gillis praised Malhotra for his leadership and strong character, and said he will remain with the club in a role that has yet to be determined.
"We're going to try and find ways here to make him contribute and, hopefully, it'll be an easy adjustment for him," said coach Alain Vigneault.
One area where Malhotra could help, said Vigneault, is in tutoring centres on face-offs. Malhotra ranks among NHL leaders in draws won.
His absence does not create a shortage at centre, because Ryan Kesler is expected to make his season debut Friday against the Dallas Stars. Kesler has been sidelined since he underwent off-season surgery on his shoulder and wrist.
"He's been medically cleared to play," said Vigneault. "He looks really good on the ice."
Vigneault said he will keep the centre's minutes "reasonable" in the early going.
By placing Malhotra on IR, the Canucks also avoided having to move a player by trade or an attempted demotion to the minors. Anyone sent down would have had to clear unrecallable waivers first.
Kesler and the rest of the Canucks were sad to hear of the end of Malhotra's season.
"He's probably one of the most respected guys I've ever played with," said Kesler. "It was tough to hear. Obviously, it's his decision and we're going to support whatever he wants to do. He's been a great friend and a good teammate."
Kesler said Malhotra's impact on the team was hard to measure, because he brought many intangibles.
"He was a huge part of our team off the ice and on the ice," said Kesler.
Goaltender Roberto Luongo said he was caught off-guard by the move. Malhotra never indicated his future with the team was in question.
"Just being around him every day, you wouldn't think that there was an issue," said Luongo. "That's the type of guy that he is."
Defenceman Dan Hamhuis, who joined the Canucks at the same time as Malhotra, said players will try to support Malhotra, who recently became a father for the third time, and his family as much as possible.
"It's a difficult time — for our team, too," said Hamhuis. "We're really going to miss him. He brought so much into this dressing room."
Hamhuis said it was difficult to hear about the move after watching Malhotra deal with his eye injury.
"He puts so much into everything he does, so much into his team and his training, coming back from this injury and working his way back into the lineup," said Hamhuis.
"It's tough to see that's coming to a close here."
Note to readers: This is a corrected story. An earlier version had Malhotra recently becoming a father for the second time. He has three children