I used to live in Toronto. You could probably do a few days there, I don't know if I would bother with a whole week.
If you stay in Toronto, definitely stay downtown. There are a lot of hotels and hostels in the downtown area. The area around Bloor and University is a good place to base yourself.
If you like Museums, there are a bunch around the Museum subway stop. The Royal Ontario Museum is very good.
I would check out a couple of areas - Little Italy (College and Bathurst) and The Danforth (Greek area between Broadview and Pape subway stops).
Niagara Falls is about 2 hours away by car, or you can get a bus if you don't want to rent a car. In addition to the falls, there are a number of bars, restaurants and a couple of casinos in the area. I would definitely recommend that you try the Maid of the Mist boat ride. Really decent.
Cheers,
Greg