Source Text: A text used by fans as a repositary for fictional facts about a fictional universe, such as the Buffy the Vampire Slayer series or J.K.R.'s website. In general, fen will decide for themselves which texts they consider authoritative, although they may look to authorial intent for guidance. Also, not all elements consists of content which cannot be transformed into propositional "facts" about the fictional universe, e.g. the soundtrack of an episode or the tone of a book. These are ignored in constructing canon, although they may be considered relevant in interpreting it (see below).
Canon: A. The total set of fictional facts about a fictional universe; B. The condition of being a member of that set of facts.
The problem is, in visual media, there's a very small amount of facts that are actually canon. Basically, we just know what people say, and a little bit about what they do (what's shown on screen). We don't know if they are telling the truth, and we don't know if things are going on as they seem. We haven't seen Xander and Anya actually having sex (and personally I don't want to), although we're led to believe they have sex a lot: we see them in a variety positions from which we are led to infer that they are having sex, or have just had sex, or are going to have sex. My favorite example happens to be the this debate over whether Giles goes to the bathroom. There's not enough canonical evidence to say for sure.
We really need a word for near-canon, those things--like the presence of Giles' reproductive system--that we would never think to question unless we were being perverse (and perversity is perfectly legitimate when writing fanfiction!). Giles could be a robot without the story being an AU, but the writer would still need to explain that choice where s/he wouldn't if s/he made Giles human, and this is despite the fact that both options are equally canon.
You see, when we think about our universes, we assume that the canon--a set of propositional facts--applies to a fictional universe, a "possible world" to use analytic philosophy language. We play "How many children had Lady Macbeth?" And in general, we imagine the closest possible world (in "logical space") to our own in which canon holds true, so we imagine Giles as a human and not a robot. The possible world closest to our own in which canon is true I call the least-hypothesis interpretation of canon, because it involves the minimum injection of weird stuff like Giles being a robot.
Sometimes when we are speaking (or typing) loosely, we treat uncontroversial facts about the least-hypothesis interpretation as if they were canon. Everyone is perfectly willing to believe that Giles is a human being until given reason to think otherwise. No one is arguing that Xander and Anya didn't "really" have sex. Buffy is fourteen (or fifteen, depending on when in the school year you think season 1 starts) when the series starts; everyone isn't merely calling her that age because she is an undercover FBI agent. Part of the reason is that it'd simply to be too unwieldly to tentatively disclaim every statement about the Buffyverse that we made, just as we never say "I see the appearance of a man" in real life: we say, "There is a man."
Unfortunately, it's not always clear which possible world in which Buffy's canon is true is the closest to the actual world. Did Spike go to Africa to get his soul? (If not, I supposed he could have lied to Buffy in season 7, although I don't know why.) Was Andrew really working under Buffy's orders in "Damage"? What the hell is going on in "As You Were"? And so on. (This mirrors debates in analytic philosophy over possible worlds: is a universe which is like ours in all respects except characteristic A at time B, and has different laws of physics to allow for the change, closer or farther away than a possible world in which the entire causal history of the universe is rewritten to allow for characteristic A at time B within our laws of physics?)
An example: In "Checkpoint," I'm inclined to believe that the ultimate result of that episode--Buffy asserting her power over the Watcher's Council--is precisely what Quentin Travers intended from the beginning. When I watch the episode, this is pretty clear to me, so I consider this to be a least-hypothesis interpretation of the ep. A possible world in which Travers is simply an idiot is farther away than the one in which he is a mastermind manipulator. But not everyone would agree with me.
Also, it's not just logical extrapolation which guides our interpretation. If Faith shoots an arrow and Angel is hit by an arrow, we assume that Faith shot Angel, not only because inserting a new and different archer would rebel against the rule of parsimony, but also because we are conversant with a cinematic convention. The convention guides our interpretation of canon. We may privilege the reading of a character as villanous if her appearance is marked by a certain type of music, and so on.
Subtexty 'ships also fall here. There are those who argue that the indicators pointing to Simon/River, Kaylee/Inara, Giles/Ethan, Buffy/Faith, or [insert your ship here] are just so anvillicious that the 'ships are canon, or all-but-canon (i.e. they are the least-hypothesis interpration). And then there are the people who "don't see" the ships, who think that the least hypothesis is that Simon/River just relate to each other as siblings, Kaylee and Inara are platonic girlfriends, and Giles never lusted after Ethan. (Although even now I'm thinking that those who don't see Buffy/Faith must be blind, I am so caught up in what I think the least-hypothesis interpretation is.)
In general, the longer the logical sequence one takes to get from canon facts to facts about a proposed possible world, no matter how valid the steps may be, the less people will accept your conclusion as being an aspect of the least-hypothesis interpretation. It doesn't matter if you have an iron-clad proof that a logician couldn't find fault with drawing on facts in "Killed by Death," "Bear Bad," "Buffy vs. Dracula," and "Normal Again" to prove that this or that happened in "As You Were." It's going to seem too complicated, even if it is the least complicated way you can integrate those facts.(Theoretically, there is a single correct least-hypothesis interpretation, or a sequence of equally correct interpretations, regardless of whether anyone can agree on them. But I'm not all that interested in it, because it's mopre important that we have a shared world that we inhabit as a fannish-linguistic community.)
The nature of canon's relation to the universe it describes is inevitably going to create ambiguities. But I think we can better understand our own disagreements if we made clear the distinction between canon and the least-hypothesis interpretation, and understood the ways in which some extrapolations of the least-hypothesis interpretation become controversial and other's don't. Any extrapolation that requires a character to be lying (whether it is Xander in "Once More With Feeling", Riley in "As You Were," Spike in "Beneath You," or Andrew in "Damage") is going to encounter resistance, for example.
Okay, in the subject I said I was going to defend ambiguity here, and I am. As wisdomeagle has pointed out before, there really aren't that many people who look at a text as if it were a set of facts about a fictional universe, basically narrowed down to fundamentalist religionists and fanfic writers. (And if Biblical literalists realized that the canonical facts of the Bible could refer to any number of possible worlds, and the closest one isn't necessarily the right--since presumably fundamentalists have a concept of "right" which isn't equivalent to a fan's notion of "best"--one, I wonder what they'd do.) I love Buffy as a playground in which to play, but also as an aesthetic object. Indeed, my aesthetic appreciation of it leads to my fannish love. And part of what I like about it is that it plays with ambiguity.
Ambiguity in a text admits of different interpretations, which enriches it. The fact that the text can sustain a reading in which Giles and Ethan were lovers as well as one where they aren't makes the text multi-faceted, interesting, more complex--for me, more beautiful. If Giles' relationship with Ethan is confirmed, if River is shown actively lusting after Simon, if Faith's last name is revealed (it's not canon until it is on screen, damn it!), then something is lost. Where we once had a hundred possibilities, a Schrödinger's cat, now there is only one. Now something is gained, too, and in many cases it is worth it (different people can argue over whether when something is worth it or not). Also, new ambiguities would be created. But I'm grateful for the ambiguities in canon, and I'm grateful that I don't know Book's past or the populatio of Londinium.
A television show is like modern art: too much ambiguity and the mind cannot create patterns, and the art fails (subtext can't survive without text); too little ambiguity and the artwork is one-dimensional, uninteresting. And "too much" ambiguity in a painting is much more than "too much" in a mainstream television serial (think X-Files). In "The Girl in Question" (one of my favorite episodes), they never show the Immortal on screen, a decision I think was utter genius. (We wouldn't like him no matter who he was, due to the Riley syndrome, so why not play with that emotion?)
Part of the point of writing fanfic is to open Schrödinger's box: I want to see Buffy and Faith in love. The desire to explore the unexplored is what drives fanfic, and it is wonderful. I'm not knocking it: write all the Simon/River, Buffy/Faith, and Giles/Ethan that you want.
But if we want our fanfic to succeed as works of art, I tend to think (feel free to disagree with me) that we should attempt to retain at least some of the ambiguity from canon, as well as throw in some of our own. Not all subtext needs to be made into text, because otherwise we're left without any subtext of our own. In Divine Interventions, I show a flashback between Giles and Ethan in which I try and play around with the pairing, keeping them slashy-but-not-slashed. I try and do the same with Simon/River in Permutations. I never physically describe the Immortal and try to keep him offstage as much as possible in my fic, as well as keeping him morally ambiguous.
All of the above has been written assuming a dead canon. New canon operates the same way as fanfic, destroying some abiguities while creating others, only with new canon the new information reorients the least-hypothesis interpretation, and suddenly the fen have a new set of ambiguities to play with it.
ETA: I should add that I was thinking in part about this post and the ones which influenced it, as well as my own Canon, the Text, and the AU in which I first make the distinction between source text and canon.
ETA2: Some more thoughts on fanficcers vs. fundamentalists, authorial intent, and open vs. closed canons.