That is not the only reason ads are substited, which is what you are referring to when you discuss "For those that don't understand let's try this as an example, on channel 3(cdn) you have family guy. On channel 7(US) you have family guy. Now, they pull channel 7, and put channel 3 in it's place. So, now you have channel 3, on channel 7's place as well. Enjoy."
What incentive does a Canadian company have to pay for rights to Canadians when half the market is lost to an ad on an American station that is not paying anything to advertise in the Canadian market? How does CTV then afford to pay for content when their ad space is devalued?
In your example, Channel 7 ads are mandated to be substituted to Channel 3 ads. There is an easy way to do that, as in theory, the content is the same, and that is by just subsituting the entire Channel 3 feed over. Sometimes this can't be done - as in one recent situation, where the Super Bowl Canadian ads were substituted over American ones. The entire feed was not substituted as some of the content (play by play or colour guys) where not the same on the US channels as they were on the Canadian channels.