It is not something new about the permanent residence in canada or any kind of canadain visas for "in canada applicants".
Buffalo visa office is the visa office serves "in canada" applicants along with the U.S applicants, so for example; if the applicant is asked for an interview, he will have to go to the U.S Buffalo to attend, and it is his responsibility to get a U.S visa. Same as the Visa stamping, Canada does not stamp visas to people from inside the country, always the embassies do that. He is not the only applicant being asked to submit his passport to Buffalo from within canada, all of us (in canada applicans) went through the same.
By the way, it is not illegal to send your passport outside the country, only India, and some other countries do that. People who live in the arabic gulf area "middle east" send their passports by mail to the United Kingdom for visa stamping.