Canadian citizens flying between a Canadian and American airport require a valid passport.  This rule is new as of January 2007, under the Western Hemisphere Travel Initiative.

Canadian citizens driving or sailing between Canada and the U.S. are not yet affected by the new rule.  When crossing the border by land or sea, they are expected to provide either:

Eventually, a passport may be required for Canadians and Americans 16 and older to cross the border by land and sea.  However, this rule will not take effect before the summer of 2008, and under proposed legislation may take effect as late as June 2009.

American citizens visiting Canada should refer to Inside Canada: Crossing the BorderCitizens of any other country generally require a passport to cross the U.S./Canada border, and may also require a visa as described in Inside United States: Crossing The Border.

The new requirement for passports when flying to the U.S. was known in advance, but in typical fashion, there was a huge last minute charge at the passport office of new applications for passports. In any case, if you wish to go onto any other territory, from the USA, say visiting Ballin Island on the 7 day around Hawaii cruise, you must have a passport to travel on the ship.  

However, it is a good recommendation to have your Canadian Passport anyways.  Using your Canadian Passport will get you through customs, going into the USA or back into Canada much faster.  It is a trusted form of identification that makes travelling to the United States a much faster and smoother process.

Entering into the U.S. through Canada

If one is flying into the United States with a first stop or change of planes in Canada, like on Air Canada, one goes through customs procedures in Canada, recovers baggage, and then boards the connecting flight to the United States by domestic flight.  This seemingly confusing procedure occurs, despite the international nature, to allow Canadian airlines to fly to U.S. airports that don't have customs facilities. 

Departing from the U.S. through Canada

If flying from U.S. airports, flights to Canada or through Canada (again despite the international nature) are most often found within domestic terminals.