Canti brakes can be a little tricky because the pads like to move as you tighten them down, but if your persistant you can get them right. Park Tool has a good site for this.
http://www.parktool.com/blog/repair-...-brake-service Pay special attention to
the Vertical Face Alignment, which seems to be one area that is constantly over looked. In regards to
Do I want the arms level when pads are contacting the rims? Or level when they are relaxed? Or not level at all?
you want the want the pad studs to be parallel to the ground (assuming you bike is standing up straight) when they are in contact with the brake surface. Another way to describe this is the two pad studs (left and right) should look like a single stud piercing the wheel and parallel to the ground, when the pads are touching the brake surface.