How do you upgrade tools in harvest moon?

Well first of all you have to have gotten some ores from the mine, but it also depends on the level of your tool. You can only upgrade a tool when it has reached a certain colour:

Bronze, Silver or Gold

If it has reached one of these levels than you can upgrade it using either the Bronze, Silver or Gold ore. To do this you have to go to the phone in your house and ring Sabaira the blacksmith and he will then ask you which tool you would like to upgrade. Keep in mind that when you give him your tool to upgrade, it takes several days for it to be completed.

Hope this helps. :)