This case can no longer be replicated.
Files embedded in modules via the Office 365 LTI that are not Office365-native generate a "You are not allowed to view this content" error, which prevents users from accessing and viewing the file.
Instead, users should be able to view files embedded in the modules via the Office 365 LTI regardless of them being not Office365-native.
Prerequisites: A Canvas course with the Office 365 LTI configured
As a Teacher/Admin, navigate to the course's modules page
Click the "+" on a module group to add a module item
In the "Add Item" window select "External Tools" and select the Office365 LTI
Authenticate to the LTI and select a not Office365-native file to embed(e.g.; PDF or mp4)
Once embedded, click the module item to preview it. Notice the error.