In rough terms -
A canonical URL is used when you have a duplicate article or piece of content on the web. The canonical link points to the original copy of the content. This is a way to tell the search engine that you are knowingly copying a piece of content and that you want to give credit to the original article. The search engine will be less likely to penalize the duplicate content and will generally give higher ranking to the original article (which would be fair).
If you duplicate content, you should always tag it with a canonical link.
Regardless of what deathshadow stated, there are times when duplicating content makes a lot of sense, and thus the canonical url comes into play. (I should add, however, that most of the time you should avoid duplicating content.)