Umm, transit has everything to do with it. More retail near Transitway stations is exactly what the OP calls for, so for the City to be opposing the expansion is ludicrous since they're fighting the expansion not based on
where on the site the expansion is occurring (which would be reasonable for the reasons you mention) but the very fact of the expansion. Like Richard says, the weird thing is that the City is opposing it at all.
Bayshore is a classic example I think of the all too present problem of planning in silos. The RMOC plonked the station to the west of the mall, forcing transit users to walk through a parkade to get to the mall (interestingly, despite the presence of the overhead walkways most people walk at grade into the ground floor of the rather dank west parkade to the ground floor doors of the Bay). The smart thing would have been to put the station to the south of the mall in that triangle of land next to the Queensway and Richmond, which would be near the centre of the mall, and some of the expansion could have been right over the station. But that is the past and Bayshore is expanding but now they're doing it in the wrong direction with respect to transit (though in fairness it is the east parkade that is in the worst shape and needs to come down, thus presenting an opportunity for them).
What it shows, at the end of the day, is little regard for transit by developers and little regard for even trying to integrate things by the City (they've got the leverage of a zoning change here, but do they make use of it to get something more transit-friendly? well, no). Then they knuckle under and surrender at Baseline to Algonquin College, who apparently just wants transit out of the way. The early Transitway developments like St. Laurent and Riverside are looking more like aberrations than anything else.