The move addresses the Raptors need for a backup to starter Kyle Lowry and also represents a homecoming for the Toronto-born Joseph.
The 23-year-old took to Twitter to confirm the move and thank his former team late Sunday night.
Joseph, drafted 29th overall in 2011, spent the first four seasons of his professional career with the San Antionio Spurs, winning a championship in the 2013-14 season.
Despite selecting point guard Delon Wright in the NBA draft last month, the Raptors were in need of experience in the backcourt after trading Greivis Vasquez to the Milwaukee Bucks.
Joseph appeared in 79 games in the 2014-15 season and averaged 6.8 points and 2.4 assists in 18.3 minutes, primarily in a reserve role.
When the NBA free agent signing period begins on July 10, the Raptors are also expected to announce the signings of forward DeMarre Carroll and centre Bismack Biyombo.
Each of these players, including Joseph, were sought by the Raptors with an eye towards improving defensively next season.