As both we and the British decision-makers at the time know (or ought to know) very well, monarchs in personal union provide a major disincentive to conflict; monarchs who are closely related provide practically no disincentive at all. George V of the United Kingdom and Wilhelm II of Germany were first cousins but that didn't stop their countries from going to war with each other. Yes, at the time Canada was loyal to the British Empire, but the British wanted it to stay that way, and breaking the shared monarchy—which even today is one of the main things, if not
the main thing, that bind the Commonwealth realms together—would be a step away from that.
A real wasted opportunity really, an idea on those lines was mooted for Victoria's sons but I think the idea of fragmenting the Empire convinced
Wasted opportunity? That depends on your perspective. From the perspective of making Canada a stable, independent, permanently monarchist nation, it's a great idea, as a native Canadian monarch removes the nationalist grounds on which many Canadian republicans base their ideas. From the British perspective, whose aim was to make Canada want to remain in the British Empire, it would be an awful idea.
I happen to agree that a separate monarch for Canada would be a good thing for the Canadian people, as it would permit them to peacefully break away from the British Empire and yet maintain their existing constitution with only very minor change, such as removing the right of appeal to the British Privy Council (since major constitutional change is a messy business that has the potential to cause all sorts of nastiness). But we have to remember that the people making the decision did not have the same goals as we do.