People say "2-tile limit" but there's a little more to it than that. Naval units can only enter forts or cities that are adjacent to a water tile. So, in effect, the longest chain of canal forts you can have is 2 (actually you can have as long a chain as you like, but barring ice or whatever it won't serve much of a purpose). The important thing to realise is that you can't connect a landlocked city or fort to the sea ever, you can only connect water with water by jumps of two (although, of course, a loophole exists for cities alongside freshwater lakes).
I've always had something of a weakness for connecting inland seas or building cities that form a canal through a large (if thin) continent, so I was thrilled that canals had been added to forts in BtS and I use it all the time. I recently played on a map that was riddled with lakes and inland seas and spent a lot of time building forts all over it. I would have made a path right through the centre of the continent, but Justinian just had to block my expansion.
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