In a word, yes. Cat litter can be toxic to small dogs. The danger lies in the canine's habit of raiding the kitty litter box. Dogs are attracted to cat poop; they like the way it tastes. Thus, an open cat box with all of its nuggets is like a Las Vegas buffet for a canine. Trouble is, dogs aren't great sorters; while feasting on kitty's droppings, they often ingest cat litter also. Depending on how much ends up in a dog's digestive system, the swallowing of cat litter can become a health problem.
That cat litter that "clumps" so easily when wet was never meant to be in a dog's digestive system. If it clumps from kitty's urine, it will also clump when coming in contact with the moisture of digestive enzymes. This clumping effect can easily cause a blockage in smaller dogs that can be removed via surgery only.
Even if the clumping effect of cat litter does not lead to a full blockage, the danger still exists for the dog to experience constipation. The thickness of the cat litter will slow down the dog's digestive system, leading to a cessation or tardiness in defecation. A small dog straining to poop can easily incur anal hemorrhages that leave blood in the stool.
Cat litter contains many chemicals designed to mask odor. These chemicals irritate the delicate lining of the stomach causing gastritis, which is an inflammation of the stomach and its lining. Sudden vomiting, decreased appetite and increased thirst are all symptoms that a dog is suffering from this ailment.
Short of getting rid of the cat, the only surefire way to keep a dog from eating from a litter box is to eliminate canine access. Purchasing a cat litter box with a covered lid and a top-side entry door is one solution. Be sure the cat is comfortable using this type of access, or you will have yet another pet problem to solve. Self-cleaning cat litter boxes that automatically sort poop from the litter and dump it into a container below that a dog cannot access are another solution.