Any document with an expired date is not a document at all. Expired Passport is also not a proof of identity. It should be valid on date of application.
Last March my Driving licence was expiring next day. Air Travel agent told me I cannot use this as identity proof during travel.
Its better to consult an Authorized Immigration consultant whether expired passport copy will be acceptable to CIC
The context for requiring current and expired passports and travel documents is not that of identity. The context of that request is to have support for the time spent in Canada (by using the document info to verify against border control systems). Therefore, for the context of travel support, expired passports are enough.
Do not confuse identity verification with any other process. In the context of identity verification for the application, you do not prove identity with your passport (expired or not) or with any other documents, including your PR card, DL or health card. Any documentation you submit is to support the information on the application (as no one can prove it was you who applied). Identity verification is done personally with CIC, when you have your interview/test. Until then, documents you send are just supporting information needs for other processes.
So, no, a passport does not have to be valid (that is, it can be expired) to apply (in fact, your PR can also be expired); however, if the person does not have a current valid passport, the person must explain why. Some countries will deny passports to persons with criminal backgrounds or under criminal investigations, and CIC will try to learn that.
The air travel agent is stepping his boundaries. If your DL is valid, it is valid to travel, it does not matter when it expires. They are trained to reject expired travel documents for many reasons; identity verification is not one of them. Just because your document is expired it does not mean you stopped being you (which is the whole purpose of identity verification, to learn if the carrier of the document is the person for which the document was issued). Identity verification can be exercised with an expired document. However, you are not allowed to travel on expired documents because there are many reasons why a person may not be allowed to renew a document and that is exactly the main concern. A person with an expired document is deemed to have been denied the right to renew that document, which is a risk, and that risk is the reason for not being allowed to travel on expired documents.