The canonical URL tag in the header of the product page and that settings are two different things.
HikaShop will add a canonical URL tag in the header of the product page if there is a canonical URL set in the product. Otherwise, it won't. However, third party plugins can potentially add such canonical URL tag regardless of that like the SEF system plugin sometimes does (so in that case, you can even have 2 canonical URL tag in the header sometimes).
If you set the "Force canonical URLs on listings" setting to "No, generate the URLs", the links on the listings to the product page will be generated dynamically each time, regardless of whether there is a canonical URL or not in the product or a canonical URL tag in the header of the product page.
If you set the "Force canonical URLs on listings" setting to "Use canonical URL and generate it if missing", instead of generating the link to the product page on the listings, it will use the canonical URL provided in the product. If it's not available, it will generate it dynamically and save it in the canonical URL field of the product. This means that when you reach the product page, you should always have a canonical URL in the product, and thus you should always get the canonical URL tag in the header.
If you deactivate the SEF system, the URL won't be generated anymore and these checks won't be done. So the canonical URL won't be filled automatically. It will work as if the "Force canonical URLs on listings" setting is set to "No, generate the URLs".
Also, We fixed many issues with the canonical URL and SEF system since the 2.3.5. So it might be wise updating HikaShop before searching for a problem that might already be fixed.