Hi there, (1) you can either choose to apply inland or outland. Though I've heard it's faster to process via outland; the downside is, when you are already required to have the Landing Interview you should go back to the US (I think?). But you can apply outland even while you're in Canada.
In inland application, you can also apply the Open Work Permit at the same time. Downside is slower processing.
So, it's really up to you
(2) I don't think they'll return it but if you can wait until you have the pictures to send along the application, the better. You actually just needed the pictures to establish the relationship between you and your husband anyway. (Someone correct me if I am wrong)
(3) You can travel outside while your inland application is in progress as long as you have the proper documents to return back to Canada and only for short trips. The premise of inland processing is that you have to stay in Canada with the spouse until permanent residence application is complete. If not, I think the outland application is more appropriate in your case as you can travel to and fro the US.