Good point. I thought of this option, too. Not in the sense that I firmly support it (I think it is easier to build the subway at this point); but rather in the sense that potentially, it is technically feasible and has a number of benefits.
Basically, you would implement new "SRT" using mainline, or mainline-compatible, equipment (rather than LRT or ICTS). That would allow to operate both the frequent rail service between Malvern, STC, and Kennedy, and the less frequent but still valuable direct service to Union.
Yup, that's pretty much it. The current SRT trip pattern would be served by the 'shuttle' route, while the 'to downtown' trip pattern would be served by the Union-bound route. Because you'd have a 4 track section, you could have a lot of flexibility with how frequently the shuttle ran, in order to better handle demand. Even if there's a direct-to-downtown option, Kennedy would still be a pretty major transfer point.
The only concern on the technical side is the need to fit mainline trains in the Midland curve and then in the guideline / Progress corridor; but I would think that it is doable if the right type of rolling stock is selected.
The curve would certainly need to be rebuilt, but then again, so would the entire guideway. Not having to fit with existing infrastructure loosens the requirements a little bit I think. Also, you can start increasing grades within the Stouffville corridor (since it's 4 tracked), which is difficult to do now with the SRT.
A much bigger concern is not technical but rather administrative. The City Council knows about 2 options; subway ir light rail. Trying to subscribe them for the 3-rd option (mainline) would be a tall order; some of them are pretty thick to be honest. Plus, the inevitable delays that will add months and years to the completion date.
That's why the subway remains my preference; but, as already said, I can't deny that your proposal makes sense.
City Council has been pretty supportive of SmartTrack so far, and Tory has a huge amount of capital invested in it. If the City can release "SmartTrack 2.0", which includes the Scarborough Spur, I think it would win a lot of votes, especially if it can be accomplished within the existing budget. Many of the pro-LRT councillors were for the LRT because it fit within the established budget, and many of the pro-subway councillors just didn't want LRT, and didn't want a forced transfer at Kennedy. Proposing a 3rd option which is basically a surface subway (I hate that term, but politically it plays well) that fits within the existing budget allows both sides to change their vote but not appear like they're backtracking.