You're right. In principle, it would benefit the smaller institutions in terms of quality, the environment and cost of living. However, the reality or corollary is that it's precisely in the smaller universities that researchers have to spend more time on things other than research, as was mentioned earlier.
That introduces a further problem when the time comes to prepare grant applications to obtain additional funding for research activities. Access to students is also a problem. There's a reason why there are more graduate and postgraduate students in the major universities in urban centres: it's because they can provide better access to scholarships and better financial arrangements.
In the regions, there's no money available for students. My institution does not systematically make university scholarships available to students beginning graduate or postgraduate studies in my field, unless they are in very specific fields of specialization. On the other hand, the large anglophone universities in major urban centres all have funds available. Much of the federal funding is used for that at the institutional level. If the rules enabled them to do what's being done in the major centres, funds could be distributed across the country in a much more effective manner and would be more inclusive of francophone settings.