Canon is the set of rules or principles regarding a certain work; for our purposes, a canon is a work of media, for example the Harry Potter series, the Batman comics, the Die Hard movies, Dragon Ball Z, etc. If you are asking about the question of timeline on the application, it would mean where in the character's series the applicant plans on taking the character from.

Headcanon are rules that aren't strictly canon, but created by the applicant. For instance, while it's canon that Harry Potter's godfather's name is Sirius, if I were to say Sirius's middle name was Antares, that would be my personal headcanon!