I know what Kano said! (spoilers)
Major spoilers ahead...
I've been watching the TV series "Shinsengumi Keppuroku", which was based on the same short stories as "Gohatto".
One episode, "The Lad with Bangs" is the Kano story almost exactly as in the movie. The same characters and incidents, with the major difference that it is Kondo, not Hijikata, who is fascinated by the beautiful boy, and Kondo who goes with Okita to watch the fight between Kano and Tashiro.
In this version of the fight Tashiro (who incidentally is quite spectacularly ugly) has Kano completely at his mercy, two swords at his neck. And Kano says "I'd rather be killed by you than kill you. I love you. If I can be killed by you I'd be happy to die. I'll wait for you in the next world." Tashiro is understandably thrown by this, and Kano instantly kills him and slashes at his dead body. There is little doubt that Kano's words were a ruse to put Tashiro off guard; Kondo and Okita realise and say to each other that Kano was the murderer and he framed Tashiro. Okita makes some remark of disgust and walks away, and it is Kondo who kills Kano. He later says "What I slew was the devil within", and Hijikata, who narrates the series, speculates on whether he meant the devil was within Kano or within himself.
Another episode deals with the incident of the two men who looked into the dojo and laughed insultingly, leading eventually to the fight in the river. We don't get Inoue's weird stories about the clever foxes, and the young pupil he takes with him is not Kano, but otherwise it's the same story.
The series is excellent, by the way, thoroughly recommended.