As far as i understand it, the Prime Minister is a member of parliament who is appointed by his party as leader of said party. He is then elected as a federal candidate if his party gets the majority of federal votes. Parliamentary seats are held by MPs elected in various areas/districts/whatever the term is. thus, a Minority government is  one which has won a federal election, but does not hold enough seats to be the majority, just like Kyle mentioned.

So basically, when I go vote, I'm voting for the federal party leader, AND my local MP. If I happen to agree with the federal policies of the Liberal PM candidate but the policies of the local NDP MP candidate really appeal to me, then I can help manipulate which type of government gets into power.

And in direct answer to your questions, AFAIK, a PM candidate is no longer in the running for an MP position, thus his MP position would be up for grabs, and the scenario you suggested wouldn't happen. An elected PM is strictly a PM.

So if the leader isn't an MP they go run in a "safe" area, but you could still end up having the leader not get voted in if there was some radical event that went on during the election, right?  It just seems a lot more shaky of a system on paper, though I realize in practice these scenario's aren't likely to happen.

Let me know if I'm making any mis-assumptions here.  Let's say we've got two party leaders, Tom Johnson and Jon Thomson.  They're both MPs for different areas of and Tom's party has the party leadership, but it's a minority government.  Tom decides to dissolve parliament and the GG is cool with it.  During the general election a maverick called Ron Paulson storms into Tom's riding and takes his seat as a member of Jon Thomson's party.  Tom's party still has the most seats, though, so they're still in power.  Would they then do the whole appointing of a "house leader" and then shuffle Tom into another riding (where the current MP would step down and trigger a by-election) and try to get him back in or would they just choose another member of the party to be PM? 

I just see some potential here for a wacky comedy about the Canadian parliamentary system where during each by-election the other party puts in a more and more out-there cast of characters to run against Tom (each of which he loses to) and eventually his party loses power and Jon takes over due to Tom's insistence that he be the one to run the party and that the party should do everything they can to keep him in power.

Unfortunately I don't think it would do well in America because people wouldn't get it since the system is so screwy... though it might be a good way to teach High School Students about how the parliamentary system works.

In fact, sinic, you got it exactly right.  When Kim Campbell took over the PC party from Brian Mulroney, she led them into a political massacre that is unequalled in Canadian history.  Mulroney was so hated by Canadians that his majority government was reduced to two seats and Canada's first and so-far-only female PM was in neither of them.  After such a debacle, she quietly resigned as party leader.

I am not a great political pundit, but I expect that scandal, broken promises and a stuttering economy will keep Mr. Harper from a majority, while the Liberals are led by a man with all the dash and charisma of Joe Lieberman, making them a probable second-place finisher.  Gilles Duceppe and the Bloc Quebecois are a one-province secessionist group whose only function in Parliament is to crap in everyone else's cornflakes.  As much as I lean left, I can see Jack Layton and the NDP losing ground in their struggle to hold enough seats to have party status in the House, as the  Green Party rides environmental issues to what may be their first multiple seats.

Especially if the Klondike bar is 24-karat gold from the actual Klondike.

In the latest news, NDP leader Jack Layton changed his initial position on including Green Party leader Elizabeth May in a leadership debate.  He now says, quite properly, that he doesn't care who else participates in the debate as long as Stephen Harper is there to act as the main pinata.  Thus the opinions on including her are split 2-1-1 among the other four leaders.  Liberal Stephane Dion was initially the only one who came out in favour of her participation, while Harper has said he'll sulk in his tent like Achilles if she's invited. 

There was some press about her not really wanting Harper's job as much as she wants a forum for her party's environmentalist platform, but she's leading a national party and has a Ralph-Nader chance of occupying the PM's seat.  I say that if Gilles Duceppe has a place in the national debate, she should too.