If that were true, we should see a drop in ridership on York Mills and Finch East since the Sheppard subway has opened. I don't think this has happened.
Except that Sheppard doesn't go far enough to really make that much of a difference. If I get on the bus at Morningside Heights (and I've done this trip often), what benefit is there to me to transfer at Don Mills to transfer again at Don Mills station? Look at Google transit and work it out. You don't save any time by doing that. The further east the subway goes the more diverting to it makes sense.
As rough math, taking into account the 5.5 km length of Sheppard and the difference in speeds (17kph for bus vs. 30kph for subway), that's a 9 minute difference to cover the same distance. However, you are tacking on two extra transfers, Finch to Don Mills and Don Mills bus to Sheppard subway. I'd say that's pretty much a wash for saving time and you have the added discomfort of transferring twice before you get to Yonge.
Now with the LRT, there's a few things to take into account. I don't think it's quite as simple as gweed says. The LRT won't be as fast as the subway. But it will be faster than the bus. Let's use my example above. But we'll start at Neilson and Finch for simplicity's sake:
1) 2.2 km on the Neilson bus down to Sheppard. 10.8 km on Sheppard LRT to Don Mills. 5.5 km on Sheppard subway.
2) 16 km on Finch bus to Yonge. 2 km down to Sheppard.
Using 17kph for the bus and 30kph for the subway and 23kph for the LRT:
1) 47 mins with two transfers. (and another transfer if you are actually getting on Yonge line).
2) 60 mins with one transfer.
Dependings on how long those transfers take that 13 mins in savings will really be significantly less than advertised (with the added inconvenience of extra transfers). Not worthwile unless you are bound for a destination on Sheppard itself.
But here's where the service issue comes in. Once the LRT is extended and crosses every major avenue, it becomes advantageous to get to the LRT if you are due for a destination on Sheppard. So from Neilson and Finch to get to Kennedy and Sheppard, whereas today I would go west on Finch and south on Kennedy, it might now make more sense to go south on Neilson and west on Sheppard, since I am incurring the same amount of transfers. When this happens, what's there to stop the TTC from cutting back service of Finch? Which might actually be a valid tactic to drive ridership on the SELRT.
This is why I'm kind of with Scarberian on this one. The most bang for the buck comes from vastly improving bus service. Curbside bus lanes, signal priority, artics or double deckers, maybe even some changes on stop placements. We could do that on every major avenue in Toronto. How much difference would that make? I'd give up a Sheppard subway extension for that.