So I did further some searching on this forum. While I didn't find any cases of returned applications for this reason, there was a post asking about question #14 and why the PDF kept telling him the second question needed to be answered:
https://www.canadavisa.com/canada-immigration-discussion-board/threads/question-14-on-the-citizenship-application.727439/
One reply in that thread suggested that he should put "overlap" as a response to that question. Another reply suggested that he shorten the "expiry date" of the old passport to the date the new passport was issued, which I guess makes some sense.
However, it is still outrageous that IRCC returned the applications to you. True that there was an overlap in your dates (and mine), but that question was specifically asking about "gaps" which are the
opposite of overlaps.
If my application were to be returned for this reason, I would write to my MP or the immigration minister to lodge a complaint.