Casey, 57, was introduced as the Raptors bench boss in June of 2011, and this past season helped lead the team to a franchise record for wins in a single season with 48, as well as an Atlantic Division title.
The Raptors lost their first-round playoff series to Brooklyn in seven games.
"From day one last summer Dwane has done an excellent job both on and off the court," Raptors president and general manager Masai Ujiri said in a media release. "There's been growth from each player on the roster and the team's identity of toughness and a desire to always compete has clearly been established.
"We're very excited to continue to grow and develop this team with Dwane as our head coach."
During his 19 seasons in the NBA, Casey has served as a head coach, associate head coach and assistant coach, winning an NBA title with Dallas in 2011.
"I thank Tim [Leiweke, the president and CEO of Maple Leaf Sports and Entertainment] and Masai for providing me and my staff the platform this season to coach and now to continue the process of developing this young team," said Casey. "We have taken some big steps toward our goal of installing a culture and a defensive mindset.
“At the same time we realize the challenge ahead in order to complete our quest to build a championship program for the best fans in the NBA."