I think your friend's interpretation of 'blue canoe' (ACW Confederate soldiers' slang for bullet) may be correct, although I've not been able to find any confirmation of that. However, I don't think that 'I took myself..." means 'I shot myself', rather it's the sense of 'I took a bullet' (i.e. was shot). For the rhythm of the song, it scans better to say 'I took myself a blue canoe' rather than 'I took me a blue canoe' ('I [xxx] me a common Southern idiom, e.g. 'I drank me a beer'.) So, 'I took myself a blue canoe' = I got shot.
'Sweet young foreign gun' would then be the soldier who shot him, 'gun' in this context being a someone who uses a gun. Taupin uses the same term elsewhere on the album: 'Ballad of a Well-Known Gun', i.e. a gunslinger.
There is also a pun in the last line of the last verse: 'Something for nothing always ending with a bad report', 'report' also having the meaning of an explosive noise, e.g. the report of a rifle (http://www.thefreedictionary.com/report), as well as the line '...in such a silent place as this, beyond the rifle range'.
I always thought the line 'Insane they took the paddles, my arms they paralysed' was a reference to medics trying to get the wounded man to safety, but, as mawsco so rightly said, songwriters put song lyrics together for the way they sound as well as meaning (if any).
At the time he wrote the lyrics to Tumbleweed Connection, Bernie Taupin was fascinated by the history and culture of the American South and the [American] Civil War era in particular; this theme is carried through much, if not all, of the album. 'Where to Now, St. Peter' is a hauntingly beautiful song about a young Confederate soldier who has been shot, is dying, and is contemplating what happens next. It's also a song about that soldier's faith - 'I may not be a Christian, but I've done all one man can'.
Sorry for the long answer, but this has been one of my all-time favorite songs for decades.
Best Answer
Since you're on English Language & Usage, I'll answer strictly from a literal English grammar POV.
"Those hungry hunters" - referring to people who act like or appear to be predators, looking for their next meal
"Tracking down the hours" - to "track down" is to search methodically, especially to examine tracks on the ground or other evidence of someone's having passed a certain way. To track down "the hours" means their searching for "hours" which doesn't make much literal sense, so this must be a more figurative or poetical sense.
Maybe the "hours" is just referring to time passing, maybe they look like predators who are chasing nothing - wasting time perhaps?
As to the "real meaning", that's an interpretation question that is open to debate. There's a fair amount of Biblical imagery in the lyrics which would take someone with a better literary sense than I have to deconstruct.