Unlike a normal search that would be handled by a department, it is
for a prestigious research position and the search is thus being
handled by University X's Office of the Provost.
First of all, since your username is "Canadian Humanist" I thought I might point out that it's not unusual for a Canadian university to handle faculty applications through the Provost or VP Research Office, even for some entry-level assistant professor positions, for example University of Ottawa does this, but at University of Victoria, even Canada Research Chair positions are processed through the department.
They'll shortlist candidates and then the successful candidates will end up essentially
as bonus positions for departments.
Usually the departments are involved quite closely in the process, even for the most prestigious positions such as Canada 150 Research Chairs, which often involve several million dollars of start-up funding.
My question thus has to do with using a reference for a position at
University of X from a professor at University of X.
I have been a long-time collaborator with a full professor at
University of X. They often write me reference letters for
fellowships, awards, nominations, etc. Normally, this colleague would
write me a letter.
But, I am applying to work at his university!
It can be helpful if an inside-member with whom they're already familiar as a colleague, writes a strong endorsement for you, but people could also be trying to help their close friend/collaborator join their department by writing a strong letter, so you may wish to have arms length reference letters too. If you're applying for a Canada Research Chair position, then you will need to have at least one arms-length letter of reference (and not too long ago, you actually needed all three of the letters of reference to be from arms-length referees, meaning that your "long-time" collaborator would not have counted, no matter their university). In fact even the Banting Postdoctoral Fellowships in Canada require arms-length referees, so if you're going for a prestigious position in Canada you may wish to keep this in mind.
You could use the fact that you have an "inside" letter of reference, to give a fourth letter of reference (if they're asking for only three). I know the advertisement for the position probably says that only three letters will be considered, but it will not hurt you if you were to write to the office of the provost saying that you wish to include four letters because one is "internal".
