OOOOOOOOO Big question. Let me see if I can give it a reasonably short answer.
To start, let me point you at the Government of Canada
website. LOTS of info there, and much more detail than I can hope to give. Read it at your leisure, if you feel so inclined.
For the purposes of gaining an understanding of this particular question/event, and what happens now, I think the most important bits are:
We elect Members of Parliament to represent us. There are 308 seats in Parliament, each representing a Constituency. There are four major political parties and a bunch of others. The party having the most seats generally forms the government, with its Leader as Prime Minister. If the party having the most seats does not hold a majority, it usually still forms the government, although it is possible for two parties to form a coalition.
The term of office can be up to five years. Generally the party in power decides when to hold the next election, which tends to be anywhere from three to four and a half years into its mandate. In a minority government situation, the Opposition parties may cooperate with the Government for a time, and allow the business of Parliament to proceed, but eventually party differences become insurmountable, and the Opposition refuses to back the Government on a piece of legislation which is deemed to be a matter of "confidence" in the government (such as a budget bill), or it calls for a Vote of Confidence.
When the Government loses a Confidence vote, it can no longer govern, Parliament must be dissolved and an election called.
This is essentially the situation in which we find ourselves. The (minority) Liberal Government barely survived a Confidence vote in the Spring, when they brokered a deal with one of the other parties around certain provisions in the budget being presented. Parliamentary proceedings have become increasing fractious in the following months.
A major issue has been irregularities in a programme of the previous (also Liberal) Government, which is generally referred to these days as "The Sponsorship Scandal". It was undoubtedly at least part of the reason this Government did not receive a majority, but an enquiry was instigated early in its mandate, and the Government promised to call an election 30 days after the final report from that enquiry. That would have put the election in late March or April 2006. The Opposition was not content with that, tried to force an election in February, and failed. They said that if the Government did not go along with that, they would call for a Vote of Confidence, and since they were united in their purpose, the Government lost.
So, now we go to the polls on January 23.
That's once over very lightly. Do have a look around the Canada site. There's even a rather chatty comparison between Canadian and American government there -- not unbiased, but perhaps useful.
Edited to add: I was concentrating so much on getting enough information into this without going overboard, that I forgot to say "thanks for asking".