A costly first-inning error put New York in a hole and the Yankees lost for the fourth time in six games to further damage their playoff hopes.
Brett Lawrie doubled home two runs in the first and New York then added to its problems when catcher Chris Stewart's passed ball on a third strike allowed J.P. Arencibia to reach first. Stewart's throw to first to try to get Arencibia was wild and two unearned runs scored on the play.
Encarnacion added his home run in the second and Toronto built a 6-0 lead through three frames.
Todd Redmond (2-2) gave up two runs on three hits in 5 2/3 innings to get the win. Four Toronto pitchers limited the Yankees to five hits.
The loss went to Hiroki Kuroda (11-10), who surrendered all the Toronto runs on nine hits in five innings.