Toronto plans to buy 204 new light rail vehicles to replace its aging fleet of streetcars. (Canadian Press)

The City of Toronto says it will have to reallocate more than $400 million to pay for a new streetcar deal after the federal government denied funding that share.

In a document released Thursday, the city manager's office said the decision was made because "the one-third federal government funding that was budgeted for this project is not forthcoming."

The decision is certain to raise eyebrows, especially since the city is in the midst of contract negotiations with its inside and outside workers, pleading poverty.

"The city's financial circumstances are extremely difficult and we have to negotiate in the real context of our current financial circumstances — particularly this year and next," Toronto Mayor David Miller said on CBC's Metro Morning on Monday.

The city said it is going to shift money around in order to salvage its $1.2 billion contract with Bombardier for 204 new streetcars. The city will now put up an extra $417 million, money that it thought it was going to get from the federal government.

Last week Ontario and Toronto announced they would jointly contribute about $800 million. But missing from the equation was Ottawa's contribution.

Federal Transport Minister John Baird said the streetcar purchase simply doesn't qualify for infrastructure funds.

The document from the city says, "It has now been confirmed that federal funding will not be forthcoming for this project and will require that federal funding be replaced with city debt financing."

Toronto will now be on the hook for a total of $836 million.

Staff recommended the TTC defer various capital projects until 2018 so there will be funding to complete the streetcar deal.

But Coun. Doug Holyday called it a haphazard way for the city to do business, "hoping that someone else is going to pick up the bill. Well things just don't work that way."

The contract with Bombardier expires on June 27 if the money isn't in place.

Council to meet Friday

A special council meeting will be held on Friday to give the Toronto Transit Commission the authority to sign the Bombardier deal.

The first light rail vehicles built by Bombardier are scheduled to start running on the streets of Toronto in 2012. (Canadian Press)

"This meeting will consider only [the streetcar] item and is necessary to complete the purchase of new streetcars for the TTC," said a news release from the city. The issue of the strike by municipal workers will not be on the agenda.

About 24,000 municipal workers went on strike on Monday.

The most contentious issue facing the two sides appears to be a proposal by the city to remove some benefits from the existing contracts.

The chief irritant is reported to be the bankable sick-leave benefit, which many union members are entitled to. Some reports say that benefit amounts to a $250 million unfunded liability for the city.

A number of Toronto councillors agitated for Friday's meeting, saying that it might be time to reconvene city council in light of the municipal workers strike and the streetcar contract.

About a dozen councillors signed a petition asking for a special session to discuss the deal with Bombardier to build new streetcars for Toronto.

But they also wanted the city to discuss the 2.4 per cent pay raise given to city councillors earlier this year and the issues surrounding the strike by municipal workers.

Coun. Michael Walker said councillors "don't look like hypocrites, we are hypocrites," because of the pay hike.

"It's like politicians down there on the ground grabbing the last penny for themselves," said Walker.

Friday's special meeting will be open to the public.