The effect works better when you have a lot of color and contrast in the scene. A little height above your subject helps, too.

The following examples are by no means stellar, but should give you an idea of what the feature can do.
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Photo by: Joshua Goldman/CNET / Caption by:
A picture of the new New York Giants Stadium. Since there's not a lot of color and it was taken almost at ground level, the effect isn't very good.
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Photo by: Joshua Goldman/CNET / Caption by:
Add more color, more contrast, and some height, though, and you get a better results.
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Photo by: Joshua Goldman/CNET / Caption by:
Canon introduced a few new creative shooting modes in 2010. This is Miniature Effect, which blurs the top and bottom of the frame and boosts contrast and color saturation to make subjects look like painted miniature models. It works to some degree, but is not as convincing as true tilt-shift photography, which is what the effect is based on.
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Photo by: Joshua Goldman/CNET / Caption by:
The top photo was taken in Miniature Effect mode, while the bottom is taken in the camera's Auto mode. All that is happening is a blur applied to both the top and bottom of the frame and colors are saturated to give the appearance of being painted miniatures. The problem is, the effect just isn't convincing enough.
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Photo by: Joshua Goldman/CNET / Caption by:
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Photo by: Joshua Goldman/CNET / Caption by:
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Photo by: Joshua Goldman/CNET / Caption by:
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