I believe that condition is strictly for checking if the canal connects bodies of water or other canals / city centers. Because there are no others afaik.
You probably can use all other conditions like any other district, but this will just limit it placement (like e.g. adjacent to river, other district, etc.)
Also, you can change terrain. Right now you cannot build it on hills.
Code:
<District_ValidTerrains>
<Row DistrictType="DISTRICT_CANAL" TerrainType="TERRAIN_GRASS"/>
<Row DistrictType="DISTRICT_CANAL" TerrainType="TERRAIN_PLAINS"/>
<Row DistrictType="DISTRICT_CANAL" TerrainType="TERRAIN_TUNDRA"/>
<Row DistrictType="DISTRICT_CANAL" TerrainType="TERRAIN_SNOW"/>
<Row DistrictType="DISTRICT_CANAL" TerrainType="TERRAIN_DESERT"/>
</District_ValidTerrains>