Why did Toronto surpass Montreal as the biggest city in Canada?

My apologies for the delayed response! I have had this question "saved" for a couple of weeks, and am just now getting around to writing something up.

First, let's start with the basics. According to the 1871 Census, the first census since Confederation, Montreal was the largest city in Canada with a population of 107,225. Toronto lagged behind Quebec City as the third-largest in the country, with a population of 56,092 - but growing quickly. By 1881 Toronto was firmly in second place, and would stay there for the better part of a century. According to census records, Toronto only eclipsed Montreal in 2001 when its population was 2,481,494 and Montreal was at 1,039,534.

However, this doesn't necessarily tell the whole story. For decades the City of Toronto as an administrative entity only included the area of what most people would imagine as "downtown" Toronto today. The "inner suburbs" like North York, Scarborough, and Etobicoke were large municipalities in their own right prior to amalgamation, and are today part of the City of Toronto proper. This matters because, prior to amalgamation in 1998, if one had included the populations of these cities then Toronto would have been comfortably larger than Montreal years - possibly decades - earlier (Montreal also went through amalgamation in the early 2000s but still lagged way behind).

Now, I am assuming you are looking for a more interesting answer than "municipal politics". I am going out on a limb and thinking that the actual, statistical population of Toronto - subject to changing boundaries and administrative hair-splitting - matters less to your question than the "concept" of Toronto. That is to say, I am interpreting your question as "When did Toronto surpass Montreal as the most important city in Canada?" For that, we can take a more historical perspective.

Although Canada and the United States were both settled in a pattern that generally went from east to west, an idea enshrined in the national mythos of both countries, the natural economic and cultural currents of the continent tend to run north to south. The Canadian Maritime provinces have economies based on timber, fishing, and, more recently, tourism. This aligns them with New England states like Maine and New Hampshire. Likewise, the agricultural background of the Canadian prairies is more aligned with the American west than with the urban and industrial culture of Ontario and Quebec.

These differences were even starker prior to Confederation in 1867, when there were fewer political pressures to foster east/west links. Montreal was the largest city in what would become Canada, and the terminus of the vast fur trading network that reached deep into the continent. However, the economy of Upper Canada -- modern Ontario -- was increasingly interconnected with the rest of the Great Lakes region, an economic sphere almost separate from the Montreal corridor. By the middle of the 19th century Toronto was the terminus of its own trade network, where grain from southern Ontario was shipped across the Great Lakes to Chicago and other hubs in the American Midwest. For instance, in 1859 only 2% of the grain shipped from Toronto went up the St. Lawrence River to Montreal; it all traveled south along the canal and railroad networks of the Great Lakes basin (Bukowczyk et al., 58). This indicates that continental trade networks, which were becoming more and more important, benefited the more centrally-placed Toronto than they did Montreal.

After confederation Toronto and Montreal became the leading metropolises in Canada, and were finally linked via railroad to British Columbia and the Pacific when the Canadian Pacific Railway completed its transcontinental line in 1885. Canadian cities lived and died by these connections in the late 19th century. In A Short History of Canada, Desmond Morton declared that the railway networks that served Toronto ensured its growth and prosperity, providing links in all directions (Morton, 6-7). Montreal had these connections as well, but Quebec City did not, and quickly fell behind. With railroads came industry, and Toronto and Montreal became the industrial hubs of Canada. Even still, Montreal to a large extent had the prominence and prestige that Toronto lacked; despite its prodigious growth, Toronto was still very much the "second city" by the outbreak of the First World War.

This state of affairs continued for decades, as both cities became leading financial centres and leveraged this power to fuel further growth. However, change was in the air. The completion of the St. Lawrence Seaway in 1959 opened up the river to larger shipping traffic, making it possible for container ships to bypass Montreal entirely and unload directly in Toronto. The city now boasted rail and water connections that allowed it to tap into continental as well as transatlantic trade networks. This allowed for even denser industrialization, and thus further growth.

In addition, political changes in Quebec that began with the Quiet Revolution in the 1960s had long-lasting effects. Financial institutions, as well as thousands of non-Francophone Quebec residents, fled the province in the decades following the bitterly-contested separation referendums in 1980 and 1995. Toronto was the beneficiary of much of this migration, especially when it came to the financial sector (Morton, 335-336). All of the "Big 5" Canadian banks, even the Bank of Montreal, now have their operational headquarters in Toronto. While there is a tendency to overstate this impact, it ought to be considered.

So to summarize, I would make the argument that Montreal benefited from being the first economic centre of the country, situated to take advantage of the predominantly transatlantic trade routes and serving as the hub of the fur trade throughout the 18th and early 19th centuries. However, as the economic poles of the continent moved westward, to Chicago and the Midwest starting in the mid-19th century, the Canadian economic axis moved in tandem. Toronto is now fully integrated into the modern Great Lakes megalopolis, and boasts the financial clout and prestige that once held it back when Montreal was the economic powerhouse in decades past. This gradual shift has made Toronto an increasingly attractive destination for internal and external migrants, a process that was helped along by political turmoil in Quebec during the latter half of the 20th century.

I hope that helps answer your question! I found it difficult to track down academic sources for this, but Permeable Border cited below was helpful for the economic analysis, and Morton added some flavour and rhetorical flair - as is his wont.