Force canonical URLs on listings
If you select "No, generate the URLs" in this option, the system will dynamically generate the SEF URLs based on the non-SEF URLs for each link.
Based on how you setup your menus/modules it can potentially lead to "duplicate URLs for the same content" issues resulting in a downgrade of your page rank.
The "Use canonical URL if specified" option will result in the system using the canonical URL that you can specify when you edit your products/categories if present.
If not present, it will generate the SEF URL based on the non-SEF URL.
Finally, if you choose the "Use canonical URL and generate it if missing" option, the system will use the canonical URL if present, if not, it will generate the SEF URL based on the non-SEF URL and then save that SEF URL as canonical URL of your product/category avoiding you the burden of filling all the canonical URLs manually.