What is the correct use of Melatonin?

I'm going to start with three answers:
1/ Melatonin is a substance about which very little is known except that it is derived from a major hormonal axis... We used to say (way back before hippie) "Please Mr. Dulles, don't muck about with the moon."
2/ Melatonin "is a potent antioxidant" and "has been promoted as an antiaging supplement". It is being promoted as a panacea.
3/ while we don't know the bottom line on Melatonin, it is probably safer then pharmaceutical "sleeping pills" and can be used cautiously to re-establish disturbed sleep patterns when they have been disturbed (though you should take a look at the paper on herbs for insomnia).

So if the answer is...
1/ the correct use is easy. Don't! (However: when I looked up "melatonin" and "side effects" on "Medline" the first dozen papers cited were all about the protective effects of melatonin!) The side effects are not easy to find in the literature and are therefore probably relatively mild.
2/ As a anti-aging panacea Earl Mindell recommends "0.5 to 1 mg in sublingual tablet form before bedtime," and
3/ for insomnia Mindell recommends 1 to 5 mg before bedtime. "Start with 1 mg., and if that doesn't work, increase the dose 1 mg. For a maximum of 5 mg. For the best result use the sublingual form which dissolves under the tongue."

Who should and shouldn't be using it?

Again, I can't find much in the literature.
There is a consensus that pregnant and nursing mothers should be very circumspect with supplements and herbs. (See beverages safe during pregnancy.)
So, melatonin is contraindicated in pregnancy and lactation. Some authors caution its use with mental illness and with the use of psychoactive drugs, e.g. tranquilizers; with allergies and autoimmune disorders (it is thought to enhance immune function); with endocrine disorders, e.g. diabetes; with other medications (and in particular steroids); and with cancers (and yet it is the centre of de Bella's [unproven] cancer therapy and there are several reliable reports of melatonin being of value in cancer treatment).
I would throw a word of caution around these words of caution. Nobody knows for sure and melatonin seems to be safe (none the less, in my practice I avoid prescribing it. I know too little about it to "mess" with a major hormonal axis).

Are there addictive traits to it I should be aware of?

It does not seem to be addictive. However, you can develop a dependency on just about anything, particularly something you are relying on to help you sleep. If you use it, use it only to reestablish a healthy pattern of sleep. Then switch to herbal nervine sedatives and relaxants. Then wean yourself of everything.

And is it illegal in Canada, why?

Health Canada's Health Protection Branch has been an ill informed and often malicious autocratic institution. They banned Hawthorne not because it has any toxicity but because people were using it to manage there heart conditions and they enforce the ban in a capricious and malicious manner. They banned Taheebo because people were using it to help manage their cancers. So the generous answer is that they outlawed melatonin because not enough is known about it. (Remember that to research a drug cost millions. Most alternative medicine remedies are unpatentable and even if they were don't promise those pharmaceutical billions. However: correctly prescribed drugs are the fifth leading cause of death! And supplements are incredibly safe in comparison.) The cynical answer is that Health Canada banned melatonin simply because they could.