An email sent in 2003 by an assistant district attorney in Texas to congratulate a junior prosecutor because he "overcame a subversively good defence that had some Canadians on the jury feeling sorry for the defendant" reveals that "’Canadian’ has apparently become a code word for Blacks among American racists". This is confirmed by Urban dictionary, which lists several instances of this use of the word Canadian.
But why Canadians? According to the Guardian,
"Some visitors report that in Southern states, particularly in rural areas, Canadians are actively disliked for their liberalism, their gun control, their refusal to support the Iraq war."
The National Post has another possible explanation:
Stefan Dollinger ( ) speculated that the slur reflects a sense of Canadians as the other. "This code’ word, is the replacement of a no-longer tolerated label for one outsider group, with, from the U.S. view, another outsider group: Canadians. It could have been terms for Mexicans, Latinos etc. but this would have been too obvious. ( ) What’s left? Right, the guys to the north."