You could say both, but the meaning is slightly different. If someone asks "Kio estas tio?" (What's that?), the answer is "Tio estas lia aligatoro" (That's his alligator).
But if there was a pool full of alligators, someone might ask "Kiu estas lia aligatoro?" (Which one is his alligator?), and then the answer would be "Tiu estas lia aligatoro" (That one is his alligator).
In that case you would use tio, as in "What is that?" "Kio estas tio?" "Estas tio aligatoro?".
I can't tell you if they're sometimes interchangeable, but I'm sure most of the times one is better than the other depending on context. Rule of thumb: tio for generic, unknown; tiu for specific, known.