The new money is part of a federal funding stream that began in 2000 and eventually became the Streets to Homes program, which aims to provide homeless people with stable housing so they can pursue long-term employment opportunities.
A community advisory board will work with the city to recommend which projects should receive money.
About 65 per cent of the $86 million will go directly to Housing First projects — part of the federal government's approach to addressing homelessness across the country.
"Simply put, we need to do more for our most vulnerable citizens," said Mayor John Tory, who was joined by Minister of State Candice Bergen, federal Finance Minister Joe Oliver and Etobicoke-Lakeshore MP Bernard Trottier at Toronto's Furniture Bank to make the announcement.
Tory said the five-year commitment will allow the city and agencies battling homelessness to make tangible plans for the immediate future.
As of April 2013, there was about 5,000 homeless people living in Toronto. About one-third of those are aboriginal, and another one-third are seniors.