The Bulldogs, who trailed 8-4 after the opening 23 minutes, scored 28 unanswered points to claim their place in the season decider before more than 70,000 fans at Sydney's Olympic stadium.
It was in-form Canterbury's 15th win in their last 16 games and the Bulldogs will be playing in their first grand final since 2004 and ninth since 1980.
The Rabbitohs, co-owned by Hollywood actor Russell Crowe, started strongly and looked the better team as they took the early lead.
But they lost their scrum-half playmaker Adam Reynolds with a pulled hamstring in the 27th minute, handing the Bulldogs the initiative.
The turning point came when the Bulldogs scored two in the final four minutes of the opening half to lead 16-8 at halftime.
Canterbury proved too strong in the second half with New Zealanders Sam Perrett, Frank Pritchard and Greg Eastwood scoring tries and star fullback Ben Barba dynamic in attack.
Des Hasler will be preparing for his second successive grand final after coaching Manly to last year's premiership before leaving to take charge of the Bulldogs this year.
It was heartbreak for Souths, who were bidding to reach their first grand final in 41 years.
Melbourne were the first team into the grand final with an emphatic 40-12 win over defending champions Manly Sea Eagles in the other preliminary final on Friday.
It will be Melbourne's fifth appearance in seven grand finals after finishing seven-tries-to-two victors against the disappointing Sea Eagles, who were always chasing the game after trailing 12-0 following the opening 19 minutes.
After being stripped of titles in 2007 and 2009 for cheating the salary cap, the Storm will have a chance to win a legitimate title at Sydney on September 30.
Melbourne's attacking trump cards, fullback Billy Slater and scrum-half Cooper Cronk, scored two tries each and dominated the game, with Manly guilty of weak defence.