Canonicalization helps to prevent the indexing of duplicate content by search engines, and as a result, may help avoid duplicate content penalties and pagerank degradation. Some pages may have different URLs all leading to the same place. For example domain.com, domain.com/index.html, and www.domain.com are all different URLs leading to your homepage. From a search engine's perspective these duplicate URLs, which also occur often due to custom permalinks, may be treated individually instead of as a single destination. Defining a canonical URL tells the search engine which URL you would like to use officially. The theme bases its canonical URLs off your permalinks and the domain name defined in the settings tab of wp-admin.