Vettel was already set to start from a relatively lowly 15th after his Ferrari SF15-T suffered power issues during qualifying, but the German will now drop even further as a result of the penalty.
He was summoned by the stewards shortly after qualifying, accused of passing Merhi - who was also called to provide his account - between Turns 12 and 13 while red flags were flying during final practice. Vettel admitted the charge and was duly punished with his grid demotion and three penalty points.
Vettel is not the only driver affected by penalties in Canada. Toro Rosso's Max Verstappen, who was 12th fastest, faces a combined 15-place grid drop, thanks to his collision in Monaco and an unscheduled engine change.