Deputy Mayor Andrea Reimer said the program is believed to be the first of its kind in the world.
As part of the program, 110 receptacles to collect butts will be mounted on posts around the city's downtown.
The butts will be collected by employees from the city's Downtown Eastside, who will take them to United We Can, which already runs a recycling depot for bottle collectors.
Other groups involved in the project include a community group called Embers and the Downtown Business Improvement Association.
Once the butts are collected they will be recycled by TerraCycle Canada, which hopes to expand the program to cities around the world.
During the summer a community group in the city's West End ran a one-day pilot project that paid people between one and 10 cents per cigarette butt, but this new program will not pay a deposit for the butts.