Pennachetti, who was set to retire as the city's top bureaucrat at the end of November, said he agreed to stay to help the city with "significant issues," particularly with the budget process, over the next few months.
"We do have a critical four or five months now to advance the city," said Pennachetti.
He said the city faces "key intergovernmental issues" over the next four or five months, including issues involving transit and funding from senior levels of government.
Tory, who officially takes over from outgoing Mayor Rob Ford in December, said Pennachetti's experience will be helpful guiding the city through the transition.
"It will be of great benefit to the city to have the services of Joe Pennachetti through this budget," said Tory. "Every additional day that we could get in terms of service from Joe Pennachetti would be a day that would be good for the city of Toronto."
Keeping Pennachetti beyond November will require a report to council.
Tory was elected mayor on Oct. 27, beating out Coun. Doug Ford and former NDP MP Olivia Chow.