Setting your Canvas Size option to Resizable Iframe does not in itself make the canvas automatically resize to conform to your content. There's a couple of other things you have to do. Check out the Resizable IFrame wiki page for the full instructions.
You basically have to create an HTML page known as a "cross-domain receiver" (which is as simple as copying and pasting their example file), and then copy a snippet of Javascript code on the bottom of all your application pages. The Javascript will perform a resize of the iframe once the content has loaded.
The wiki page has improved since the last time I used it, so hopefully it's fairly straightforward. If you run into problems getting it working, make sure you check that you've modified the javascript snippet appropriately so that it points to your cross-domain receiver page.