No argument with the advice above, but here’s another 2 cents into the pot:
Drilling and plugging these holes may well be satisfactory, and you will have conserved the original material of the canoe. Instead of dowels, consider using plugs cut by a plug cutter (such as available at
http://www.leevalley.com/us/wood/pag...at=1,180,42288). If visible, the grain of a plug will look better than the end grain of a dowel, especially if you will be using any stain when refinishing. Because the seats and thwarts are attached with through-bolts, the end grain of a dowel, not good for driving a screw into, is not a strength consideration with regard to attaching the seats and thwarts. If this is a closed gunwale canoe, there will be no visual impact; if an open gunwale canoe, a small plug might be hidden by the head of the hanger bolt.
Enlarging the holes might minimally affect the structural strength of the inwale, and if located where the gunwale has a significant curve, might affect the fairness of the curve. But I’d be inclined to think that in a canoe this old, and otherwise in good shape, the inwales will hold their shape fine, especially once plugged, and the change in structural strength would be very little. Plugs would be very slightly better than dowels in these regards.
If strength and/or fairness of the curves are significant issues, and/or if perfect cosmetics are a significant concern, the best way to go would be to bend in a new piece of wood to replace the old inwale.
Next best would be to cut out the damaged portions of the rail and scarf in new, full-dimensioned wood. Properly done, a scarf joint is essentially as strong as a solid piece of wood, though there may be a cosmetic issue, depending on how well you match the colors of the wood and how sensitive you are to the visual impact of a scarf joint.
For either plugging or scarfing, I would use a good epoxy, not the stuff from the local variety store -- especially not the "5 minute" stuff. Titebond II or II should also work.
For some discussion of scarfing repairs, see:
http://forums.wcha.org/showthread.php?8474-cutting-scarf-joint
http://forums.wcha.org/showthread.p...-%96-Quetico-by-summer-2015!!&highlight=scarf
For a good discussion of Titebond II and III , as well as epoxy and other glues, see:
http://forums.wcha.org/showthread.php?11621-Scarfing-rail-stock&highlight=scarf
We'd love to see some pictures as you go along, and of course, when you are finished.
Greg