Hamilton started fourth but dropped back to finish fifth and is a point behind Vettel a third of the way through the season.
Finn Kimi Raikkonen finished sixth in the second Ferrari.
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"I said yesterday that this place means a lot to Ferrari and to have a race like this is unbelievable".
"I think they've waited long enough for Ferrari to do well here". "When we got to qualifying, honestly we knew it was going to be very close as it was, but in my heart, I truly feel like we had the pace to lock out the front row, or at least I had the pace to be on the front row".
The timing of Vettel's win could not have been better, coming on the 40th anniversary of the late Gilles Villeneuve's victory for the Italian team in 1978 at his home Grand Prix. It's Vettel's fourth pole on the Ile Notre-Dame, and his first since 2013.
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The pair were eliminated in Q1, along with Toro Rosso's Pierre Gasly and Williams duo Lance Stroll and Sergey Sirotkin.
The Toro Rosso was launched into the air, wrecking both cars. Both cars were badly damaged but the drivers were uninjured. Noting that he had a lap count on his steering wheel and on his pit board, he said: "After I saw the flag, I told the team "I think the race isn't over yet" and they said "No, keep pushing".
Hamilton acknowledges Ferrari has the stronger package at the moment but he is confident of bouncing back in the coming rounds with Mercedes' upgraded power unit set to debut in the next round in France. It was the same for Bottas running behind Vettel.
McLaren's Fernando Alonso chalked up 300 career grands prix but the Spaniard had little to celebrate as the two-time world champion's day came to an early end, his McLaren coasting to a stop midway through the race with a mechanical failure.
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Hamilton had gone into the meeting in Montreal with a 14-point advantage but leaves one point behind Vettel, a vast swing he would not have anticipated from one of his favourite circuits. A grandstand finish looked possible until Bottas ran off at Turn One and took to the grass before recovering.