Giorgio Mammoliti told reporters centralizing brothels on the islands accessible by public ferries would reduce prostitution elsewhere in the city and generate millions of dollars in revenues for the city, CITY TV reported.
Toronto has a $784 million budget shortfall.
The islands are now home to a small residential community, parks, an airport and a clothing-optional beach.
Mammoliti, a conservative, told the Canadian Broadcasting Corp. regulated brothels had a potential secondary benefit.
"In an economic sense for the city of Toronto, we could probably do something that will create tourism as well," he told the CBC.
He said the time was right to take advantage of an Ontario provincial court ruling that struck down anti-prostitution laws on technicalities last September.
There was no immediate reaction to Mammoliti's plan from Mayor Rob Ford's office.
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