Yes, absolutely, it is a loophole that can be exploited, and it has been exploited.
To give you a parallel example, which I think spells the issue out more clearly, you have the United States signing information surveillance agreements with Denmark. They signed an agreement with the Danish intelligence agency and they said, “You can use our networks to spy on anybody outside of Denmark, but you can't spy on Danish citizens with them.” Then they made an agreement with the German government and they said, “You can use our networks to spy on anybody outside of Germany, but you can't spy on Germans.” It's the same network, so if they're on both points in it, then they effectively get access to everybody's information. It's a neat trick to say, “We're not using your network to spy on you”, but obviously it's a loophole that allows the system to be subverted.
As for how the system has functioned, my understanding is that previously Canadians traditionally have not had as strong an oversight over our intelligence services, but our intelligence services tended to respect boundaries much better. The information that I have heard suggests that under the previous Canadian government, that dynamic changed dramatically, and Canada's intelligence agencies became far more aggressive. Not being in a position to personally be able to oversee it, it's difficult to say, but that's the impression that I have.