After some more troubleshooting I've narrowed down my problem to something that works currently on a CF7 box.
If I remove the <cfoutput>#application.pathtoroot#</cfoutput> the file is included properly.
#application.pathtoroot# allows me to develop on a server where the site can't start in the web root directory and in this case = "/site/".
While the above code with <cfoutput> in the template attribute of the cfinclude throws an error, the following does not so I know it's not a path issue.
The error message displays the proper path when saying it cannot locate the included file "Could not find the included template /site/includes/body_header.cfm."
I also tried changing the scope from application. to mysettings. and the error still occurs.
Looks like the problem was the cfinclude tag no longer needs <cfoutput> tags wrapped around the pathtoroot variable I had set. I knew it had to be a stupid problem!
As far as I know one has never been able to embed one CF tag within another one.
And certainly having <cfoutput> there is meaningless, because you're not OUTPUTTING that variable; you're just using it.
Ahh, ok. I guess a more correct statement would have been "no longer allowed/tolerated"