According to the Government of Canada's Canadian Heritage department, the history of Canada is as follows: In 1535, two Indian Youths told Jacques Cartier about the route to "kanata." They were referring to the village of Stadacona; "kanata" was simply the Huron-Iroquois word for "village" or "settlement." But for want of another name, Cartier used "Canada" to refer not only to Stadacona (the site of present day Quebec City), but also to the entire area subject to its chief, Donnacona. The name was soon applied to a much larger area: maps in 1547 designated everything north of the St. Lawrence River as "Canada." Cartier also called the St. Lawrence River the "rivière de Canada", a name used until the early 1600s. By 1616, although the entire region was known as New France, the area along the great river of Canada and the Gulf of St. Lawrence was still called Canada. Soon explorers and fur traders opened up territory to the west and to the south and the area depicted as "Canada" grew. In the early 1700s, the name referred to all lands in what is now the American Midwest and as far south as the present day Louisiana. The first use of "Canada" as an official name came in 1791 when the Province of Quebec was divided into the colonies of Upper and Lower Canada. In 1841, the two Canadas were again united under one name, the Province of Canada. At the time of Confederation, the new country assumed the name of Canada.

Well, since Kim's already done such a good job providing the serious answer, there's nothing left for me to do except offer up this joke etymology that you sometimes hear in the USA: The story goes that Canada was actually named by drawing letters at random out of a hat. The letters were drawn in the order C, N, D. The man drawing the letters was recorded as saying, "C, eh... N, eh... D, eh..." Okay, it's a lame joke. Down here in the USA we have this idea that Canadians attach an "eh" to the end of everything. We also think they say "aboot" instead of "about." In reality, the few Canadians I know don't talk like that... but it's fun to cling to our little linguistic stereotypes. I give any Canadians who read this my blessing to mock USA English as much as you like. You probably already do anyway! :)

CANADA Although time has indelibly imprinted "Canada" on the map of the northern half of the continent of North America, numerous other names were suggested for the proposed confederation in 1867. Among these were: Albertsland, Albionora, Borealia, Britannia, Cabotia, Colonia, Efisga (a combination of the first letters of England, France, Ireland, Scotland, Germany, and Aboriginal lands), Hochelaga, Norland, Superior, Transatlantia, Tuponia (an acrostic for the United Provinces of North America), and Victorialand. The debate was placed in perspective by Thomas D'Arcy McGee, who declared (February 9, 1865), "I read in one newspaper not less than a dozen attempts to derive a new name. One individual chooses Tuponia and another Hochelaga as a suitable name for the new nationality. Now I ask any honourable member of this House how he would feel if he woke up some fine morning and found himself instead of a Canadian, a Tuponian or a Hochelagander." Fortunately for posterity, McGee's wit and reasoning, along with common sense, prevailed, and on July 1, 1867, "the provinces of Canada, Nova Scotia, and New Brunswick" became "one Dominion under the name of Canada". While the Dictionary of Canadianisms lists ten possible explanations for the word (ranging from Spanish Acan Nada to a form of Canara or Canata, a place name in southern India), the generally accepted origin may be traced to the writings of Jacques Cartier in 1536. While sailing up the St. Lawrence River, Cartier noticed that the Indians referred to their settlements as kanata, which, from its repetition, the French took to be the name of the entire country. Such it was destined to become in 1867. Source: Hamilton, William B. (1978): The Macmillan book of Canadian place names, Macmillan of Canada, Toronto, p. 21.