From the Super Mario Wiki
“Look, we can't very well ride in a tiny little Toy Train. That'd be impossible. Put that back in its toy box.”
The Toy Train is a small toy train resembling a mushroom used in Paper Mario, and it is required to access all parts of Shy Guy's Toy Box. To get the train, Mario must find the Storeroom Key and give it to Harry T. in Toad Town. Harry will unlock the storeroom and let Mario take anything he wants.
When Mario puts the train into the Toy Box, it becomes huge and fits the track. By solving puzzles, Mario can open the track to all the stations, allowing the train to move freely throughout the Toy Box.
It also appears on the Toy Dream in Mario Party 5. There, it looks nothing like it does in Paper Mario and can be ridden if someone lands on the ? Space at the top and bottom of the board. There, it will come and pick up the player and take them to the other station (bottom to top and vice versa). The player can get coins on this train by jumping.