The scaling and video processing in the Onkyo is at least as good as that included in the budget Toshiba HD DVD decks. However, I've a feeling it won't be worth your while using it in the context of your proposed set-up.
For one thing, while I can't speak for the cheaper Toshiba decks, I can say with certainty that if you choose not to use its video scaling, my HD-XE1 (fully updated with the latest firmware) will only provide a 576p or 480p output from DVD. In other words, it automatically applies progressive scan processing. That means that the Onkyo receiver's deinterlacing won't be used on this sourceÿ(although the video scaling will still be relevant, of course).
As to the scaling conundrum: well, yes, invite your Toshiba to fire out 576p DVD-Video signals, and the Onkyo will take said signals and scale them to the resolution you need. However, I think it'll be a fiddle to live with if you intend switching between DVD and HD DVD content on a regular basis, because the Toshiba's set-up menus only allow you to set a resolution output, rather than allowing 'shift on the fly' scaling options like some DVD players do.
That means you have to access the set-up menus to select to 'Up to 1080p' resolution. Configured this way, the Toshiba will output HD DVDs at their native 1080p resolution, and scale DVDs to match. However, to use the Onkyo's video scaling for DVDs, you'd have to knock the resolution back down to 'up to 576p', leaving the TX-SR875 to pick up the pieces. Fineÿ- as I said above, it'll workÿ- but that means you'll have to go back into the on-screen menus and change back over to 'Up to 1080p' when you want to watch an HD DVD. If you don't, then your HD DVD player will first downscale your HD DVD to 576p, before your Onkyo scales it back up to 1080p. Not good.
Last thing: if you are thinking of buying a Tosh, make sure you get the EP-35, not the EP-30: the latter player won't output TrueHD audio and the like from its HDMI output.