I think that a northward extension of the Bathurst streetcar, replacing a portion of the Bathurst bus route, makes sense so long as both routes could be accommodated (somehow) at St. Clair West Station. I'm not certain how much of an issue Bathurst's grade north of Hillcrest really is given that the St. Clair cars use it daily to come in and out of service, but that's one rationale that been mentioned for why it hasn't happened in the CLRV era. The other rationale has been that Bathurst bus riders benefit from the direct connect to the Bloor - Danforth Line at Bathurst Station. I don't use the route, so I have no way of judging this but, given that there has never been a direct transfer between the Bathurst bus and St. Clair West Station for subway access, I think that it is difficult for anyone to say which option TTC customers would prefer. A trial run, possibly outside of peak periods, might be in order.
I live near Bathurst and St Clair, frequent user of the 7 bus and I have a few observations about this one.
For one thing, the Bathurst/St Clair intersection is set up very oddly. Southbound cars have to go to Vaughan road and then back over to Bathurst. Despite having one of the few working white-bar priority signals in the city this is a ponderous operation at best.
If you go to Bathurst Station and watch a 511 streetcar arrive you notice that maybe only 10% of the passengers actually cross to catch the 7-bus. The benefits of through-routing are minimal. There are a lot of people that get on/off at St Clair, but the same is true at every concession intersection along Bathurst. The route turns over about three times between Bloor and Steeles and seems to function primarily as a short north-south shuttle for those arriving from an east-west route from the Y or S subways.
There is a "walking transfer" allowed between St Clair West Stn and the 7-bus, and some people do take the 512/90/126 out of the subway, but most of the transferees there seem to be either locals walking in, or coming from the West on the 512. Not a lot of the traffic is coming from the subway. On the other hand, there is a fair bit of N-S through traffic at St Clair. Moreso than at Bloor, anyways.
They did have Bathurst broken up for a while, into a Bathurst Stn to St Clair W stn shuttle and a St C - Steeles shuttle last year while rebuilding the rail overpass down by Dupont, the shuttle was very lightly used and the northern segment really didn't see any change in use.
The reality is
a) there's no benefit to running the 511 up to St Clair W. It's not a major through route connection, the traffic is a bit iffy and I imagine the hill on Bathurst is a deal-breaker. Doubt the TTC really wants to run revenue streetcar service on that hill.
b) IF you did decide to run the 7 to St C W you'd have to set up a short shuttle on the southern bit of the route. Costs money and adds complexity for a route that saw fairly light use last time it was set up last year.
c) You could basicallly send the 7 as it is now but send it looping through St Clair W. However, the transfer traffic is really not heavy enough to bother.
For various reasons, the way it is now makes sense.