Ethanol
is poisonous, it's just a sort of mild poison that human beings can metabolise. It's not anywhere near as poisonous as methanol, though. Ironically, the treatment for methanol poisoning is imbibing ethanol.
It's not technologically impossible to derive clean water with medieval know-how from salty or contaminated water, but it can be energy intensive and I can't think of any examples from history where a large population (or even a small, but permanent one) was settled in a place without access to clean water but with access to brackish water, and where they desalinated the water.
It surely isn't above dwarven 'ingenuity' to develop a large, complicated method of desalinating water in large quantities, although the game doesn't support the mechanics for it at the moment, I think (I don't think steam can condense into water droplets, which can then rain into puddles of water atm). Nor is it unfeasible for dwarves to use a still to distill water in small quantities for medical purposes.
What I mean is that dwarves should not possess the technology to desalinate an ocean in five minutes by means of a single wooden pump powered by one untrained dwarf peasant. That is a bug. It's a bug I like, but that might be because it's impractical to run any fort without using a pump to clean the water used for the well.
EDIT:
Water has been collected from the air for at least 2,000 years using air wells in Middle Eastern deserts, and later in Europe. The Incas were able to sustain their culture above the rain line by collecting dew and channeling it to cisterns for later distribution. Historical records indicate the use of water-collecting fog fences. These traditional methods have usually been completely passive, requiring no external energy source other than naturally-occurring temperature variations.
Oh. It seems ancient peoples are quite capable of getting water, anywhere, if the need be.