This street appears to have been built sometime between 1908 and 1912. (It was established by ordinance in 1906, but that was legislation, not construction. [It was also originally named Ewing Street, the original name of N 34th Street, which still exists on the Queen Anne side of the Ship Canal.]) When the plat of Denny & Hoyt’s Addition to the City of Seattle, W.T., was filed in 1888, no such street was needed, because there was no canal. Instead, Ross Creek connected Lake Union to Salmon Bay. However, as work on the Lake Washington Ship Canal progressed, the Fremont Cut came into being, and it must have been felt a street paralleling the canal to the north was needed, since the original plat took no notice of the creek or any future canal route. (One to the south was needed, too, which is why Nickerson Street was extended from 3rd Avenue W to 4th Avenue N, at the southern end of the Fremont Bridge.)
Why, then, is Canal Street so short — not quite ⅓ of a mile from N 34th Street and Phinney Avenue N in the east to 2nd Avenue NW in the west?
As it turns out, even though Canal Street was to run to what was then the boundary between the cities of Seattle and Ballard at 8th Avenue NW, shortly after Seattle annexed Ballard in 1907 another street was laid out parallel to the canal connecting Fremont to the new neighborhood of Ballard: Leary Way NW (then simply Leary Avenue, all the way from Market Street to Fremont Avenue). Leary became the main arterial, and in 1951 NW Canal Street was vacated between 3rd Avenue NW and 8th Avenue NW, reducing it to its present length. (Until 2016, there was a slight discontinuity in the vicinity of 1st Avenue NW and N 35th Street where the built street deviated from its right-of-way, making it even shorter.)
So this isn’t quite the same as our trio of S Front Street, S River Street, and S Riverside Drive literally being cut short by the rechanneling of the Duwamish River into the Duwamish Waterway — more one of Canal Street being supplanted by Leary Way and becoming more valuable to the city as industrial land than as roadway.