Except you completely miss a huge opportunity to address all the major densification being put in place south of Pape (the ex-soap plant corporate campus planned by First Gulf, West Don Lands, Distillery District), you miss the opportunity to have a GO transfer station (at Gerrard or the Queen bridge).
South of Pape? Pape runs North-South...
And those neighbourhoods you mention will be served by a combination of the DRL and the East Bayfront LRT. There may be small pockets of densification on the east side of the Don, but nothing compared to the west side.
As for the GO connection, having a subway GO connection at a place where both lines are going to the exact same place (Union) is a bit redundant, isn't it? I'd much rather see a GO-TTC connection exist at Queen with a Queen LRT than a DRL, at least then they're going to different places.
Then, north of Castle Frank, you're stuck. Whereas, north of Pape, you can densify to the DVP at Don Mills and run the line as LRT through to Eglinton, a huge transit opportunity (build out the commercial campus, OSC, the apartments all around the north side of the valley.
No you aren't, you run the line through the Don Valley. Yes, the line would skip Riverdale and the area around Pape north of the Danforth, but that's it. There isn't an extraordinary amount of density along that route (heck, half the route south of Danforth is through a rail corridor with only a couple stops planned).
But it still hits the major pockets of density like Thorncliffe & Flemingdon Parks. Also, crossing the Don from Pape over to Thorncliffe would be a pretty expensive feat. By not having to cross the Don at all, you eliminate that. Building the line at-grade through the Don Valley from Castle Frank to Overlea would be a heck of a lot less expensive than tunnelling from Pape-Danforth, then building a bridge over the Don Valley, and then going back under Overlea.
Interesting idea, although I don't see why it needs to be linked with de-coupling the Yonge and University lines -- surely it would be cheaper just to route the DRL along Wellington.
Any station at the heart of the Financial district will be astronomically expensive to build, given the number of underground considerations that need to be taken into account. By decoupling, you can build a new Union station platform running NE-SW under the eastern end of the Union rail corridor, with an underground connection to both GO and the existing Union via the streetcar loop.
The ease of construction at Castle Frank is a nice benefit, as is the shorter length of tunnel. But like Riverdale Rink Rat said, the tradeoff is that you miss the Distillery and the Don Lands, and north of Bloor there's absolutely nothing until you hit Thorncliffe Park.
I just suggested the Front St alignment because it's the most direct route, but there's nothing stopping the line from dipping south and then using the Esplanade to Parliament. In fact, since most of that has a wide strip of parkland, it's probably easier to use than Front is, although Front will allow for more density.
But with the LRT going in along Cherry, that area will still be pretty well connected by transit.
As for having nothing between Bloor and Overlea, the reality is that even a Pape DRL would still only have 1 station between Danforth and Overlea anyway. Building an extra 2km of tunnel, plus a crossing of the Don Valley, is a lot extra for 1 station, isn't it? To put it in perspective, from Overlea & Milwood to Don Mills & Eglinton is about 3km.
I'm not sure about the densification argument. St. James Town is already ultra-dense. Cabbagetown is not going to change. Regent Park is already happening. So it's only the southern end of Parliament where much would change, and I think that's going to happen whether or not a subway is built.
Cabbagetown is most certainly going to change. They're already pushing the wall of condos over to Sherbourne St, which isn't that far from Parliament at all. What's to say that it won't be pushed a block further east?
Also, despite the density of the Parliament corridor, I don't think a Parliament DRL would have as much of an impact as a more easterly routing, since Parliament is so close to the core that a lot of those people will be walking, biking, or taking streetcars downtown. A more easterly routing would have less competition from these modes. Similarly, a Parliament DRL seems less likely to divert many riders off the streetcar routes coming in from the east, since there'd be little to no time savings in transferring from streetcar to subway that close to the core.
Most people in Cabbagetown who are taking the streetcar are taking it to connect to Yonge or University. None of the streetcar routes in Cabbagetown actually go downtown (downtown being anything south of Queen). The Dundas streetcar kind of catches the tip of it, but that's about it. Also, the N-S transit in that area is pretty bad, especially when you compare those routes to the frequencies of the Spadina and Bathurst streetcars, which are roughly mirror to Parliament compared to Yonge.
I think it's really a chicken and egg scenario. There isn't a lot of demand for the route right now because the routes that currently exist don't go where people want to go. The Parliament and Sherbourne buses don't curve in and go to Union, or even go anywhere close to downtown. No matter what route you get on in that area, you're still at least 1 transfer away from getting downtown.
And like it or not, that wall of condos is going to continue pushing east, just like it has continued to push west (the number of high-rise condos in the Entertainment district has at least tripled in the past 5 years). Sherbourne north of Carlton has seen 3 major projects in the past 3 years, with at least 2 more in the works now. And then there's Regent Park, which is just really getting started. I see this time as the beginning of the build-up, not the end.