McIver said Monday that jailing the mentally ill hurts the offender, often makes the situation worse, and places a heavy financial burden on the system.
"We need to care for these people," McIver said in response to a question at a party campaign event.
"Putting them in jail, having them victimized by somebody because of their mental illness, having them on the street self-medicating and doing illegal things to buy drugs or alcohol doesn't solve the problem.
"I'd like to see people sentenced to mental health care, the ones that need it, rather than put them in jail with people that are just going to victimize them again."
Leadership candidate Jim Prentice said the province must do more to treat the root causes of mental illness, including homelessness.
He said he recently was in Fort McMurray at a vigil for people who had died on the streets there in the last decade.
"That shouldn't be happening in a society as wealthy as ours," said Prentice.
"No one deserves to die alone on the street."
Leadership candidate Thomas Lukaszuk said more work must also be done to eradicate the stigma of mental illness.
"The education aspect of it is very important, to allow patients and family members and friends of individuals with mental health illness to solicit the help that they need," he said.
"We can't afford not to make this one of our priorities."
The candidates were speaking at the formal launch of the leadership contest, which concludes with voting in September.
The deadline for candidates was May 30.
The race will name the permanent replacement, and premier, for Alison Redford.
Redford resigned in March ahead of a party and caucus revolt over a number of issues, mainly her exorbitant spending on herself and her inner circle.
Prentice is considered the front-runner, with all but a handful of the Tory caucus endorsing him.
The 57-year-old former Calgary MP and cabinet minister has already announced he will continue to borrow to pay for schools, roads, and hospitals.
He has said the province has no choice with thousands of newcomers arriving each year.
But he has promised an accelerated paydown of the debt, now at almost $9 billion, with an overall cap on borrowing.
On Monday, Lukaszuk told reporters he, too, will look at debt financing to pay for infrastructure.
"We have slipped on construction of new infrastructure and maintenance of existing infrastructure," he said.
"I think Albertans also agree that in order for us to build all this infrastructure in short order ... we will have to look at alternative financing."
But he said paying down the debt must not be done by running a deficit on day-to-day spending.
McIver has yet to say if he will continue the debt financing plan for infrastructure.
He said Albertans have told him they want the budget balanced and the infrastructure built.
"In between that we may need to make some very tough decisions and set priorities," he said.
McIver and Lukaszuk were both cabinet ministers under Redford but recently left their portfolios to run for the leadership.
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