Not sure if this is the intended behavior of the badge system.
- Flag a question (eg: duplicate)
- Get awarded Citizen Patrol
- Retract the flag
- Badge rescinded
- Badge is not rescinded
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Per the FAQ on Badges, the only criteria to earn this badge is that you flag a post:
- bronze; awarded once
- Flag a post
It doesn't matter if the flag is acted upon by a moderator or retracted by the user (as you observed). You still performed the one and only requirement to be awarded the badge: flagging a post.
As to why it wasn't rescinded when you retracted it - the system generally never removes badges, even if the triggers for them are no longer there. Once you qualify for the badge and are awarded it, you keep it. The point of the Citizen Patrol badge is that you are aware that flagging is possible, so using the tool, whether you retract or not, is the important thing.