In a release Monday, the government said Fantino will remain in cabinet as associate minister for defence — the same post he held before being named international co-operation minister in 2012.
This time, Fantino will focus on Arctic sovereignty, information technology security and foreign intelligence, the release said.
The change was made during a quiet ceremony at Rideau Hall around midday and addresses for now what has been a nagging controversy for Prime Minister Stephen Harper.
O'Toole is both a former member of the Canadian Forces, and one of the founders of the True Patriot Love Foundation, which raises money to support military families.
As he left Rideau Hall, O'Toole told reporters, "It's a pleasure to serve our veterans."
Fantino faced repeated opposition calls for his resignation or firing in the fall over his handling of the Veterans Affairs Canada portfolio. The department has faced much criticism from some veterans because of the decision to close regional offices and for a lack of support for veterans with mental illness.
In November, the auditor general found the department was not doing enough to provide mental-health services to veterans, just days after it was revealed the government had returned nearly $1 billion in lapsed funding to the treasury in recent years.
Fantino was out of the country attending commemorative Second World War events as the opposition called for a response to the auditor general's report.
Fantino was roundly criticized for a testy meeting with veterans early last year and for refusing to speak with the wife of a veteran who pursued him down a hallway in Parliament.
In an earlier attempt to address the problems at Veterans Affairs, Harper named Walt Natynczyck, a popular former chief of defence staff, as deputy minister in October.
Harper had defended Veterans Affairs handling
In an interview with CBC News chief correspondent Peter Mansbridge last month, Harper was asked whether he remained confident in Fantino as minister.
"By definition the prime minister has confidence in all of his ministers," the prime minister told Mansbridge.
He defended the government's handling of Veterans Affairs, but conceded that "as time has gone on, it’s become apparent that there are some gaps" in programs.
"We will respond and make the changes we need to make where we see real gaps in the services," he said.
In a op-ed column that ran in Sun Media papers on the weekend, Fantino wrote he was "pleased at the progress we have made over the past year [in Veterans Affairs] and am fully committed to seeing further progress and improvement as we move into 2015."
O'Toole was elected to the House of Commons in Durham, east of Toronto, in a 2012 byelection to replace Bev Oda, another former minister who left cabinet amid controversy. Since 2013, he had served as parliamentary secretary to International Trade Minister Ed Fast.
O'Toole is a graduate of Royal Military College in Kingston, Ont., and served in the Royal Canadian Air Force until 2000. He also has a law degree from Dalhousie University in Halifax.
His father, John O'Toole, was the Progressive Conservative member of the Ontario legislature for Durham from 1995 until last May.