A Canonical URL basically refers to the authority or preferred URL that is associate to a particular site. It is the URL that the search engines pick up and rank for. To put this in lame man’s terms the canonical URL is the URL that you want people visiting, seeing, linking to and the search engines to rank.
To help with the understanding of a canonical URL consider all these URLS below:
www.alaisterlow.com
alaisterlow.com
alaisterlow.com/index.html
alaisterlow.com/home.asp
Most people would see all these URLS as being the same but in reality they are 4 different URLs and websites. The search engines see these four URLs for example as independent and totally different. This now raises the issue of duplicate content, which is why the canonicalization of your URL is so important. This refers to picking the URL that you want to use as your main one and presenting it to the search engines.
In order to overcome this problem of duplicate content across different websites and different URLs that appear the same there are certain practices that you as a webmaster should consider.
1) Always link to the same canonical URL. This refers to internal and external links. Always make sure when linking internally all your links are uniform. It is best in my opinion to use absolute URLs rather than relative ones to ensure you never have any broken links in the future. Also encourage external linkers to link to you canonical URL. You can do this by having a place on you website with html linking code where other web masters can simply copy and paste into their website.
2) Use 301 permanent redirects to point all your separate URLs to you canonical URL. Search engines will be able to follow all these redirects and identify your canonical URL. This will eliminate the issue of duplicate content and boost the ranking power of your entire website.
3) Use Google Webmaster Tools to specify your canonical URL.
4) Ensure your sitemap only contains your canonical URL and no variations. This is important as all the search engines will trawl through your sitemap and treat which version of your URL you have there as the most important. If you mix and match different version, www.alaisterlow.com and alaisterlow.com the search engines will simply get confused.
5) Lastly you can add in a canonical url element into your html between your and tags. This canonical URL element will basically specify and tell the search engines which URL is canonical.

This canonical URL element makes is easy and simple for the search engines to immediately identify your canonical URL.
Below is a great video featuring Matt Cutts (Head of Spam at Google) speaking about canonical URLs and the canonical URL element. I strongly encourage you to check it out.
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