I do agree though that the officer is mistaken and seemingly unaware that passports can be issued outside Canada.
Not defending the employee who doesn't know what they're talking about, but I can see how this could get garbled.
Years ago passports could be printed / finalized abroad. Some embassies and consulates etc had blanks, and they could print them on the spot. But they centralized it for security reasons, and of course with newer hi-tech passports, it's a lot more complicated. I think there are only a handful of locations where they physically print them (but don't know the numbers).
But of course you can still apply for one abroad. They'll still print one with issuing office listed as London or Jakarta or Canberra or whatever (I know, I have one, the 'whatever'). Just it'll be printed in Canada somewhere and sent to the mission abroad. Same with most of the 'passport offices' in Canada, really - it might say North York or Regina but be physically produced somewhere else. (This whole idea of the issuing office might be a bit antiquated, if we're being honest)
It takes a little longer if you're abroad but not that long. To the user it's mostly the same except for the timing.
Anyway you can see how some employee with only a bit of training picks up the info and gets it a bit wrong: instead of issuance (in the sense of 'production/printing') of passports is centralized in Canada, they hear words with overlapping meaning like 'issuance' and get that to mean you have to do it all in Canada.
*I presume, well, I kind of know, they have SOME ability to print some sort of emergency travel docs / 'passports' of limited validity in the consular offices. But they are quite strict about these, and you won't get one unless it's an actual emergency. And it might only be valid for days or weeks, only for travel to Canada, and it won't look like the fancy passports with all the embedded security features, etc - that requires special equipment.