Leafs GM John Ferguson and Sundin's agent J.P. Barry had been in talks for over a month. What originally had begun as a two-year extension ended up being a one-year deal. The contract includes a no-trade clause.
The 36-year-old Swede had 76 points (27-49) in 75 games with the Leafs this season while earning $7.6 million.
"We are extremely proud to have Mats continue as captain of the Toronto Maple Leafs," Ferguson said in a statement. "Not only has he been one of the greatest players in our franchise history, but his exemplary leadership on and off the ice has been all that any organization could want from a team captain.
"We will again rely on Mats' playing ability on the ice and on all of the contributions he makes to the development of our young players."
Sundin has been with the Leafs since the lockout-shortened 1994-'95 season and has had no fewer than 72 points the past 11 seasons.
Despite missing the playoffs this year, the veteran centre once again reiterated his wish to remain in Toronto, where he hopes to finally bring home a Stanley Cup.
The Leafs were facing a Friday deadline to either exercise or decline a $4.56-million option Sundin had on his old contract.
Neither side wanted that to happen. The Leafs would have had a salary cap hit of $6.33 million - the average yearly pay out of his old deal - even though the actual money paid out to Sundin would have been less.