Both /u/kieslowskifan and /u/commiespaceinvader have said the origin of the name, while probably associated a perception of Canada as a land of wealth and plenty, is ultimately mysterious and likely to remain so.
The name is a mystery. The redoubtable /u/commiespaceinvader wrote in their follow-up answer that while we know a lot of the slang in the camp emerged within this closed, very heterogeneous, society of inmates, the origins for this slang is highly speculative. The ethnic diversity of Auschwitz's inmates means that it is difficult to pin down a specific, national/regional/ethnic rationale for Canada to emerge. The general theory among Holocaust scholars is that Canada represented a land of plenty, but why Canada emerged and not, say, USA or el Dorado is unknown and probably will never be known.
The linked commiespaceinvader answer goes into more detail, saying that yes it probably has to do with Canada being a land of plenty, but we don’t really know for sure and we also don’t know why Canada and not somewhere else. In fact, a lot of the camp slang (“Lagerszpracha”), he points out, has origins unknown.
There are several historical analysis of the Lagerszpracha as well as whole dictionaries in various languages but the origins of some of the terms remain shrouded in historical mystery. The term Kanada proved so persuasive that even the SS started using it and all explanations by former prisoners point to Canada being associated with wealth and plenty. Why on the other hand it wasn't the US or – let's say – Urugay, is impossible to say.
Other examples from the Lagerszpracha that continue to defy explanation of their origins would be "Achtzehn" (eighteen) for danger, "Caracho" for doing something fast, Gummi (Gummy) for matraces, the usage of Kapo instead of foreman or something else or the term for a prisoner close to the end of their life "Muselmann" (an old fashioned and not really appropriate German term for a Muslim). While all these terms have some kind of explanation as to why they were used, why exactly these terms were in usage throughout the entire system instead of another term is impossible to say. They just caught on.