There are a few reasons why running trains overnight on the LRT would be better. You wouldn't have to maintain a separate set of shelters along the entire line. The LRT stops will likely be more comfortable, and riders wouldn't have to worry about where they should be standing based on time of day. The LRT will presumably have signal priority, which the buses would lack.
On the other hand, as you said the bus could provide closer stop spacing. It would also provide a better transfer at Finch West station, where almost everyone would be boarding another bus when the subway is out of service.
Part of the answer too will come down to who is operating this line and under what terms. The province is constructing it, but we don't actually know that it will be operated and maintained by the TTC using unionized workers. If the province contracts out operations/maintenance for this line, then the terms of the contract would presumably determine operating hours.
