I implemented the canonical tag last year in a similar situation and yes, it's on the original page as well. No issues. Look at eBay.com, they also have canonical tags on all pages including the original page.

I have not seen/encountered any issues. Now when I go check the cache for http://www.example.com/duplicate-url-3.html which has a canonical tag referring to the original-url, Google shows me the canonical URL. The duplicate pages literally disappear from the SERPS, because essentially its like a 301 redirect.

As I said I completely agree with you. There's is certainly "some" level of trust passed on and WebSEO's comment sounds right, because if that would not be the case that blogs on xxxx.blogspot.com and xxxx.wordpress.com would rank like crazy. So yes, number of sub-domains on a domain as well as the interlinking between the domain and the sub-domain would certainly influence the strength of the sub-domain, a little bit more.

The most important factor here that should help you make the decision easily is the usability and brand awareness of the sub-domain when it's attached onto your main authority/brand site.

As I said above in my 1st post and EGOL agreed, it would have been much stronger if you were able to do it as a sub-folder but I understand the technology issues. You might also want to look into Reverse Proxy if sub-folder is an option.

You are not, you are absolutely right on the way you are thinking. Except that I have not seen any of that "root domain" advantage get passed onto the sub-domain level.

If your main-domain is a brand domain, maybe you could do the sub-domain and I understand your reasoning behind it, however I would not expect the sub-domain to trickle through the SERPS and get the domain authority and trust like your root level domain does.

The sub-domain won't essentially help you. Think of your sub-domain as a separate domain, almost. If it's possible from branding and other reasons, do a sub-folder and if that does not make sense or is not doable, your best best is go got Option 2. That according to me sounds better from Search perspective both short term as well as long run.

Sure and FYI here's my question about the same topic I asked day before.

http://www.seomoz.org/q/seo-conferences-which-one-s-do-you-attend

Jocelyn, I have not been to a MozCon per se, but I have been to another SEO Conference for several years now. There's a considerable amount of value in terms of staying on top of what's going on in the industry, what other folks/companies are doing, helping forward thinking and above all the opportunity of meeting/networking with tons of other people like yourself. That alone justifies going to MozCon and I am considering to go myself as well. I'd love to say hello in case we both make it ;).