It's not unique to Toronto; Los Angeles is encouraging local businesses to use Laos' TLD (c.f. http://www.la)
You're right it's just a re-purposed .TO domain, but at the time we met with the Tonic guys and came up with the idea the new TLDs hadn't happened yet.
AND we figured it was going to be better than something like .TORONTO (All these new TLDs have suffixes longer than the actual domain names...)
What's up with that? Is there something I'm missing or are they just selling tonga [1] domains under the toronto label now?
[0] http://web.to/ [1] http://www.tonic.to/