Yeah, improvements to that belt line would be a tough sell. Houses' backyards are right up against the line and it bisects the intersection of Main and Gage right through the middle. I guess a new line in the median of the Red Hill Expressway would be an alternative.
I don't see why double-tracking the Hunter Street tunnel would have to be that complicated. It was originally double-track so it's wide enough. The floor would have to be lowered to increase the clearance to allow the double tracks to be reinstated.
Red Hill Creek's not an entirely crazy idea, though the grades would likely be fairly challenging and it's a pretty meandering route. The Belt Line already sees relatively frequent freight service. A few trains shifted off the TH&B plus a few VIA trains a day wouldn't be the end of the world. I'm not talking about double tracking and elevating the thing. Just fixing up the tracks a bit, building new connections at either end, and maybe re-working that intersection. The problem is that no matter what GO spends on fixing up the TH&B line, as soon as the improvements are built CP will make like Castro on the Simpsons saying "What trillion dollar bill?" They'll still fight every single new GO service kicking and screaming. CP will never sell the line without a very good alternative route.
As for getting CN to give up the trackage rights... that wouldn't be a problem. CP already has rights on the Oakville sub east of Bayview, so what are a few more kilometres? Besides, railroads are still a heavily regulated industry. A little squeezing from the federal government would go a long way.
London's tearing down half the Borough Market for Thameslink. Surely we could knock down a couple houses in East Hamilton...
edit: The more I look at it, the more I think this idea makes sense. CP may well be willing to abandon its entire line to Niagara, since they already use trackage rights on CN east of about Welland, and it's not like there's much in the way of on-line traffic. Looking at Google Maps, cnnecting the Belt Line to the CN Grimsby Sub should be even easier than I thought. there's a giant parking lot there, so all you'd have to do is bend the line west into the parking lot, giving a turning radius wide enough to make the turn back to the east. The Gage/Main intersection shouldn't be that difficult: spend $100,000 on the top-of-the-line level crossing protection equipment and it would be safer than it is now. The main line through Guelph runs right down a residential street, which is much worse than the Belt Line. All it needs is new tracks and a little fencing, and it will be just fine for 25 mph, which is all you really need.
GO would even pick up a useful yard at Aberdeen.