Canon is whatever you chose it to be. This may be as limited as a specific episode or season of a show, or as wide as personal correspondence of an author and extrapolations from rough drafts. Fanon can be just as broad, though there's often an element of group consensus to it. It may be as simple as logical guesses taken from source material, to wild guesses from hinted at events, or sheer random facts that really aren't supported by anything but a lot of people using them.
Perhaps due to the fact that I read more than I write fanfiction, I don't tend to look at canon in the same reverance. Let's say there's a pairing - oh, like Draco and Harry. Obviously, this did not happen in the canon presented in the Harry Potter series, and it was not likely to happen in the series. However, to me, this doesn't matter in the slightest. The fact that it would not happen easily in almost any stage of the series also doesn't matter. This is not to say that I don't care about plausibility within the rules of the universe.
Instead, I'm more interested in the plot. Introspection about events, or retellings from other people's points of view don't really interest me unless if the thoughts / retelling provide a good story, or a compelling resolution. Seeing the old familiar characters in a world that feels like thier world isn't enough of a appeal without a good plot to back it up.
Can you see what I mean? I am not worried specifically if it is merely movie canon or whatever. I want to see a good story. One where the canon is as integral to the whole as the plot, and the plot is interesting even if you do not know who the people are. The characters, world, canon - everything is malleable with the interest in making a good plot. I want to show / read / find what I love about this universe / characters. Another way of putting it may be that I'm canon sensative and aware, but not canon bound if it makes a better story.
I suppose some of it is that canon, for me, is a question of a coherent feel to the story instead of a strict bible to follow. I want the "what if" in my stories to be complete as a story and not merely attempting to add another spoke to an existing wheel. That's not to say that stories that don't follow this aren't good. All I'm saying is that I wonder what sort of stories someone might write if they looked at things as I do. Or do you already?
Here's some examples of how I use canon -
1. What appeals to me in it? The plot? The characters? The writing style? The ideas behind it? The potential for how it could be twisted? The fanon interpretations of characters?
For example, I love how fanon has played with Seifer in FF8. In canon, there's - hints to some sort of troubled past before he got the Garden, and there's hints of definite creepiness when he meets the Sorceress for the first time. In fanon, there's his rivalry with Squall playing out like a soap opera and the drama of what happens after he's no longer a brainwashed enemy. I don't really care about the canon since it's rarely interested in Seifer. I do about the fanon.
2. What in the canon supports what I think would be fun? How can I avoid what doesn't support it? What needs to happen in the world to set up what I want?
Let's say I think that Snape and Harry could make an intriguing pair. Obviously, canon doesn't help this, since Snape is dead. However, I can figure out how, for example, to try to make them work together and avoid the canon ending.
3. Characters / places / tropes may appeal to me in the story. If I like a pairing, how easy is it to happen? Do I want to write out how it happens, or just focus on the interesting consequences? Does canon have a specific area / idea or something like that that'd make this emphasis especially compelling? If it's all over fanfiction and I'm bored with it, is there some sort of AU interpretation of the events that'd have a new twist?
Take Gundam Wing, for example. I love Trowa in there. Let's say I randomly decide that Duo would be a good match with Trowa. So - when? Where? How? Why would they work well? Why wouldn't they? Yes, these might not be the canon pairings. Half the fun is showing why I'd use them. I don't care so much about defending their love in their canon. I do care about defending it in their story.
4. For the plot, is the original writing style and tone a requirement, a hindrance, or merely a pleasant flavor to add to the mix?
British slang, for example, matters more if it flows well and doesn't have blatant mistakes instead of being perfect in every way. Ditto for research. If the bdsm sounds like Sex for Dummies and the travels to Europe sounds like wikipedia, it's not going to appeal to me, no matter how accurate it may be.
5. If it's an AU, are the characters and the world still close to their original self?
So, for example, let's say the base was a FF7 like world, but things have changed so utterly, that neither the original game, nor the other bits of canon fit, and the characters are like new people. At this point, it'd almost be better to change the names rather than to continue that saying this tired scientist with the dying mutated arm is really Hojo.
In the most simplest sense, I'm looking at the plot and the joy of the story before I worry about the nuts and bolts of the specifics. I think that's why people who're annoyed at canon mistakes seem to be missing the point to me. I want to see a good story about people who're close enough to the fanon or canon that I know instead of a canon I love with a good story.