The former West Ham man has agreed a four-year deal, worth £68,000 per week, potentially rising to £90,000.
Defoe, who has played more than 250 games for Spurs, said: "Everybody knows how much this club means to me, I will play my heart out until my last kick."
Speculation grew over Defoe's future this season when he was often used as a substitute by former Spurs' manager Andre Villas-Boas, with summer signing Roberto Soldado preferred as a lone striker.
He is the second-top scorer in the Europa League with seven of his nine goals this season coming in the competition, but his position on the bench has not changed since the appointment of Sherwood, with Emmanuel Adebayor used as Soldado's strike partner.
Defoe can continue to play for Spurs until the move, with a Europa League tie against Dnipro at White Hart Lane on 27 February the last match he will be available to play in.
"I have had a fantastic time here and the fans have always been amazing to me," added Defoe, who is fifth on Spurs all-time scoring list with 142 goals and the club's top scorer in Europe with 23 goals.
"I am grateful for the opportunity for myself and my family to experience living overseas and for me to play in the MLS with a contract that will take me to the age of 35. I have no doubt I shall be coming back as a fan supporting the team in the years to come, too."
After joining Spurs for the first time from West Ham in 2004 for £7m, Defoe scored 64 times in 177 appearances, form which saw him become a regular in the England squad.
He spent a season at Portsmouth in 2008, before returning to White Hart Lane and has played 55 times for his country, scoring 19 goals.
The move to Toronto FC, who are managed by former Spurs and Blackburn Rovers defender Ryan Nelsen, leaves Spurs with Soldado, Adebayor and 20-year-old Harry Kane as attacking options up front.
"Jermain has played a big part in the club for many years and we all know he will give his best until his last minute in a Spurs shirt," said Sherwood.
"We have several attacking options within our squad for the remaining dozen or so games of the season after Jermain departs and we shall keep our options under review.
"We also have a goal threat from players in other areas of the pitch including having wide players and attacking midfielders who will enable us to vary our shape when required."
Toronto finished second from bottom in the MLS Eastern Conference last season and start their new campaign at Seattle Sounders on 16 March.
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