Financial terms of the deal were not disclosed by the team but local reports said the contract is worth $49 million.
"Dion is our team leader and has been a pillar in our building process," Maple Leafs General Manger Dave Nonis said in a statement. "He has proven to be a very durable and reliable defenseman in all facets of the game."
Phaneuf, 28, began his NHL career with the Calgary Flames but was traded to Toronto in 2010. The former first round draft pick has 110 goals and 245 assists in 630 career games.
He has 15 points in 39 games this season for a Maple Leafs team that is in fifth place in the Atlantic Division.