I'm sorry, but it is nonsense to say that English people do not refer to dogs as "he" or "she", whether they are their own dogs or other peoples'. If I know the sex of another person's dog I would regard it as rude to call the dog "it", and most people of my acquaintance would always call my dogs "he" or "she" rather than "it".
In any case, "he" is as grammatically correct as "it" as a translation for "C'est" in this situation, so "he" should surely be acceptable.
Well I already explained why I think it's not acceptable for this exercise, I provided sources as well concerning the theoretical use. I won't try to defend my point over and over again. If people think it's acceptable, then please go ahead and give your arguments and your sources.
One might think that native English speakers are the best sort of source one could have for a question like this. But if you want independent data, let's take a look at this: google "He's a good dog", "she's a good dog", and "it's a good dog." Those three phrases respectively get 581,000 hits, 1,320,000 hits, and 915,000 hits. So that's 1,901,000 for he/she vs. 915,000 for it.
On the surface, that looks pretty even; it looks like English speakers use "it" frequently to refer to individual dogs. But look closer. Not a single one of the hits on the front page when you google "It's a good dog" are using "it" to refer to an individual dog. They include phrases like "it's a good dog's life" (where "it" = "life"), "it's a good dog food" ("it" = "food"), and "it's a good dog" in a discussion of hot dogs ("it" = "hot dog").
You can try similar phrases to judge for yourself -- e.g., "it's/he's/she's my cat".
This kind of method doesn't make sense in my opinion.
For example if you take the sentence "it/he/she is my cat". It doesn't take into accounts all variations, like "it's probably my cat" or "it's my beautiful cat". You could then try to add "it's my cat" without quotes, but it would then give you far too many results, like "it's ... cat" or "... my ... cat". And taking into accounts only the results from the front page compared to several hundreds of thousands to make an opinion is obviously not accurate at all.
Also, a search engine doesn't give you all pages from the Internet concerning the topic you're searching for. It uses complex algorithms to select pages that can potentially provide the information needed. For example if you ask "It's my cat", it will surely not give you every single forum post about cats or every single comment from articles, etc... Not from a long shot. It will try to filter the "relevant" from the "irrelevant" (those not necessarily being what we consider "relevant" and "irrelevant"). Thus it will miss a lot of common uses or even whole conversations about cats (for example).
Furthermore, Google is really not the kind of search engine where you want to make these tests. It tracks users on the Internet and on other Google services (Youtube, Gmail, etc...) to try to provide better results and more importantly better advertisements. Never noticed how you suddenly find yourself with an ad concerning shoes shortly after you made some research on the new sneakers you wanted to buy ? So it will basically try to guess what YOU'll want to know, not what really exists. It's a "Bubble" : http://en.wikipedia.org/wiki/Filter_bubble
Anyway, I got a bit carried away there.
It seems to me that unless a representative from Duolingo can prove otherwise, it should allow "He is an old dog" as an acceptable phrase, because this has now become a cultural issue as to what is acceptable, in terms of proper usage, endearment, etc. They have allowed far to many phrases thus far with "C'est" at the beginning and allowed it to equate to either "It is" or "He" to start nitpicking now. There is my 2¢ :-)