Checking a dictionary will tell you that the adjective canonical comes from the noun canon, meaning a rule as in canon law especially pertaining to the Christian Church, authoritative, accurate and other similar meanings. This goes some way to explaining its use in the SEO industry.
Canonical in terms of SEO
Most commonly the term is used to describe the best URL choice. In other words the URL that you want the users and search engines to visit. Best practice is to inform the search engines which URL is the preferred one for a site, thus avoiding the search engines making the decision themselves or considering different URLs as separate pages.
Canonical URLs in practice
Many web sites find that they have a situation where multiple URLs all lead to the same page. This can be due to a number of factors but most commonly will be where both a non-www (for example http://example.co.uk/index.html) exists alongside the www version (for example http://www.example.co.uk/index.html). Both these URLs will typically point to the same page which can lead to duplicate content issues and split link equity.
Add to the above examples that many websites may also have duplicate pages as a result of the root domain (for example http://www.example.co.uk/) and default document (can be index.html, index.htm, index.asp, default.htm, default.html etc) both being present and added to this sometimes an HTTP and HTTPS version of the site. Follow that up with a .com domain with the same content and the scenario could end up having all of the following URLs pointing to the same page:
- http://www.example.co.uk/
- http://www.example.co.uk/index.html
- https://www.example.co.uk/
- https://www.example.co.uk/index.html
- https://example.co.uk/
- https://example.co.uk/index.html
- http://example.co.uk
- http://example.co.uk/index.html
- http://www.example.com/
- http://www.example.com/index.html
- https://www.example.com/
- https://www.example.com/index.html
- https://example.com/
- https://example.com/index.html
- http://example.com
- http://example.com/index.html
The good news is that there are many ways to remedy this problem, from the optimal 301 redirecting through robots meta tags to the new canonical link element, but with so many people using the term ‘canonical’ it is important to make sure everyone is singing from the same song sheet.

Server Services says:
March 25, 2009
Nice tips.
Actually canonical is a new term in SEO industry. Really we have to take care of URL’s so that duplicate issue can not be created.
Good Example:
http://example.co.uk/index.html
http://www.example.co.uk/index.html
Both these URLs will typically point to the same page which can lead to duplicate content issues and split link equity.
Ian Macfarlane says:
March 25, 2009
Thanks for the Sphinn!
Yes, the best solution to duplicate content is definitely not to create it in the first place – unfortunately, duplicate content is often created by default on most servers and CMS platforms, and remedies need to be implemented to solve it. Thankfully, there are lots of ways of dealing with it when it does arise.
The word "canonical" is a somewhat recent term for webmasters, but not as recent as many think. For example, Google employee "Googleguy" used it back in 2003 on Webmaster World (http://www.webmasterworld.com/forum3/15894.htm).