It was a bit of a mystery - but once I set-up the zones and countries linked to them, the Canada Post options suddenly showed up. I put Canada into a Canada Zone and the Canadian rate options show-up in the checkout; for Canadian addresses; US is in North America and it seems to work for US addresses, and international for others.
btw I am using the $39 Canada Post module which populates the list of delivery options. Before, I had the free delivery issue and no carriers but now it is working.
What I don't understand is if, with the module, I still have to do the whole rate matrix seeing that the module is supposed to use Canada Post to calculate prices. There is no documentation for this module.