I think a combination of my idea and Fresnelly's would be awesome...
The key is to intensify the area. Make it so the Gardiner becomes just another building. Redesign key areas of the underside to provide attractive links to the waterfront.
Also cover over the raillands and beautify it... This would do a lot to link the city to water. The rail lines are much more divisive than the Gardiner when it comes down to it.
Just in case you don't know... you guys should check out
www.spacing.ca. It's an excellent resource for Toronto urban planning issues.