The five-times Serie A winner lost his place in the Rangers starting lineup to former England keeper Robert Green and has made only one appearance this season in a 4-0 FA Cup defeat by Everton in January.
"I know Ryan Nelsen (Toronto head coach) very well, he told me the door is always open in Toronto," said Cesar.
The 34-year-old keeper, who has 77 caps, is Toronto's latest high-profile arrival after they signed Tottenham Hotspur's England striker Jermain Defoe and U.S. midfielder Michael Bradley from AS Roma before the MLS season starting on March 8.
Toronto general manager, Tim Bezbatchenko said: "Adding a player of Julio Cesar's experience and ability only strengthens our club both in the short and long term.
"We are committed to creating a culture of winning at TFC, and there are few people in the world of soccer with a proven track record of consistently getting results that Julio has. We are very excited to bring him to Toronto FC."
The Canadian outfit are trying to revive their fortunes after a lowly finish in last season's MLS.
(Reporting by Toby Davis and Tom Hayward in London, editing by Ed Osmond and Ken Ferris)
