The device, contained in a dark duffel bag, was detonated at about 7:45 a.m. ET Tuesday.
The blast charred the sidewalk and rattled windows throughout what is usually a busy intersection in the city's downtown core.
Officers from the city's Emergency Task Force (ETF) were called to the intersection of King Street West and Blue Jays Way after the white, four-door Honda Civic was stopped by police at about 3:30 a.m. Two men were taken into custody.
Two bomb-disposal robots were sent in to investigate the trunk, and a duffel bag inside that police deemed suspicious.
The stop was part of an ongoing investigation into a recent string of overnight arsons, according to police at Toronto's 14 Division.
King Street West is closed between Spadina Avenue and John Street, and Peter Street is closed between Adelaide Avenue West. and Front Street.
The intersection was reopened to pedestrians shortly after the detonation but remained closed to other traffic.