Flatten Mode does consume or collect soil contextually, but there's an issue that causes Flatten Mode to be disabled if there's no soil at all in an attached canister. If you have even a little bit available, and Flattening is only removing terrain, than you should find canisters start filling accordingly. (Technically, the amount of soil collected or consumed is 1:1 with the net total change in terrain, so if you're both removing and adding while Flattening, then the amount of soil in your canisters should effectively hold static).
Also confusing the matter is that added terrain doesn't change color if the change is below a threshold. So even if you don't see any grey terrain, it's possible that small amounts are still being added (and consuming soil from canisters in turn).