sqiddster Part of it is the time required by the GPU to swap your low resolution rendered image to a location where it can draw from that image. Another is the fillrate hit you're going to take drawing your upscaled low resolution image to the full resolution of the screen. If you have a lot of layers, you end up drawing a lot of massive images on top of each other to composite them into the final image. In comparison, when drawing everything at the full resolution from the start, you don't have to worry about rendering layers to their own intermediary targets and then compositing them -- you simply draw all of your sprites sequentially starting from the bottom layer.
Perhaps if you had relatively few layers and were rendering a lot of smaller images to each of them, you might get some benefit from intermediary low resolution rendering. But if your layers consist of, say, one or two large background images each, you're absolutely going to take a hit on performance.
EDIT: I figured I should mention, I absolutely agree that something could be done about the performance of fading to a solid color. Setting the background behind the canvas to your color of choice and then adjusting the transparency of the canvas itself would do the trick, if possible. This precludes the ability to draw, say, text on top of the fade, but it at least helps in some situations.