As Rob says -- paint it and use it.
Here are some links to some discussions in these forums of painting over old cracked or chipped paint, when you want the paint to last only a season or three or five before re-canvasing:
http://forums.wcha.org/showthread.php?t=5790 see pp. 2-3 of this thread
http://forums.wcha.org/showthread.php?7769-Painting-over-existing-paint&p=41339#post41339
http://forums.wcha.org/showthread.p...t-Restoration-advice-please&p=32358#post32358
http://forums.wcha.org/showthread.php?7775-Temp-repair-to-bare-spot-on-canvas&p=41357#post41357
http://forums.wcha.org/showthread.php?7619-time-is-not-on-my-side!&p=40689#post40689
http://forums.wcha.org/showthread.php?8564-Smoothing-Canvas/page2 starting at post 12, on bondo spot putty
http://forums.wcha.org/showthread.php?6607-sanding-or-not&p=35286#post35286
http://forums.wcha.org/showthread.php?8906-Repaint-Tips
No paint job is any better than its foundation – surface preparation is critical. Painting over peeling paint is pointless – the old paint will continue peeling, taking the good paint with it. But if the old paint is basically sound, and/or you sand off the loose paint, a fresh coat of paint can make a canoe look better, even if the new paint job is not perfect, and even if the old paint is a bit cracked.
My experience suggests that, at a minimum, removing loose, flaking paint, and then brushing on a coat or two of paint, either water or oil based, will get you through a season or two of paddling for only a couple hours of minimal work, until you have the time and the inclination to spend the time on a proper restoration.
New paint will not keep old paint from flaking, so it is important to remove all blistered and flaking paiint, and then take steps to make the new paint stick. Sanding/scraping the flaking paint away may be sufficient, as long as what is under the old paint is compatible with the new paint to be applied. Spot putty may fill in minor scratches and dings. In any case a light sanding over all is called for to help new paint adhere. After sanding, at a minimum I would thoroughly wash the surface (soap and water, or TSP) and rinse completely, and let the canoe dry completely before applying new paint. It may also pay to use a primer (Zinsser or Kilz) intended to isolate problematic old material from the new paint.
But if the paint is tight, even if crackled, a coat or two of paint will prevent most, if not all, leaks and give you a serviceable canoe. But discretion being the better part of valor, it is wise to have a small roll of duct tape along if some of the old paint/filler under your newly-applied paint decides to flake off. But even without a duct tape repair, the resulting leak will likely be very slow and will likely not interfere with a day of paddling.
Additional sanding, more spot putty, more primer may give you a somewhat better looking surface, with almost no improvement in function – at the cost of whatever extra work you wish to undertake – but while you will have a somewhat better looking boat, you will not be able to make a silk purse out of a sow’s ear. To get that “silk purse” look, you will need to replace the canvas and then do a proper fill and paint job, when you have the time and inclination to do it right.
Repainting canoes is done all the time, with all kinds of paints. Most use an oil based paint, and many use “marine” paints. Some use various other paints intended for exterior use – house paint, porch and deck paint, etc. Oil-based gloss paints are most commonly used. Water-based paints can work, as can semi-gloss paints. They are easier to apply, and may be easier to touch up in the future – the chief disadvantage I have found with it is that it is not so easy to keep clean, a particular problem with the light yellow color on my canoe.
My yellow Old Town 50 pounder (seen in some of the links above) has seen 5 seasons of use with old canvas, chipped filler, crackly paint, and a few unrepaired cracked ribs and planks, for just a few hours of necessary work -- light sanding, spot priming, painting with water-based deck and porch paint (and a few more hours just messing around with unnecessary painting of triangle designs) -- I didn't have the time to restore the canoe without losing a season of paddling. Now retired (and having another canoe to paddle) I have recently removed the canvas to begin a full restoration.