Why This Video Appears in Full Canvas?
It's weird. I see all resolutions - upto 1080p - on Youtube. And the thumbnail hover does show the full frame as seen in your VLC snapshot, but not in the playback window on Youtube.

youtube-dl shows streams in a 1:2 ratio i.e. 540x1080, 360x720, which would be what you're seeing locally.

You can use ffmpeg, a free command-line tool, to crop out the remainder.

ffmpeg -i video.mp4 -vf "crop=iw:iw*9/16,scale=0:-2" -crf 20 -c:a copy new.mp4