I have both, so let me try.
Better is not a word I would use. They are both good in their own way, but the iPhone has more functions (phone and SMS obviously) including GPS for location services, and GPRS/EDGE for connectivity when not near wifi as well as camera.
The iPod touch is thinner and lighter; and I also think it is better on battery life, but that may be in part because several of the apps unavailable to the touch are somewhat processor or graphics intensive: I have to charge the iPhone usually once a day, while I may get a couple of days out of the iPod touch.
Depending on where you are (and I note you show you are in Canada - Rogers) the cost of the iPhone may be higher with service charges, while this can be offset as these are monthly: you have to buy the touch outright.
If you want the device for music and videos, plus synchronisation of contacts and calendars along with a few games, the touch might suffice. However, it is not a stripped down iPhone and the iPhone is not a beefed up iPod touch. They do have separate identities and uses.