I like that Idea, they let the fans shape their world and lore to a certain extent.
Not really, you only getr to shape the lore if the developers are willing to let your work be officially published, or the Bethesda sees some fan theory or something from fan fiction, likes the sound of it, and just says "Sure, why not?" and add it into the official lore. It's not just any fan who can decide what is and isn't canon in the Elder Scrolls. And in any case, the Elder Scrolls isn't exactly the first example of a setting where material outside of the main works has been considered canon.
But yes, I think it's safe to say that Infernal City is canon, I certainly see no reason it shouldn't be, after all, it's not like it violently contradicts everything we've learned in past games, as far as I know, while I haven't read it, all the new lore from it I've seen mentioned on these forums seems like things I could believe are true given what I already know of the setting, or future events I could imagine happening based on what's happened in currently released games (Even though they aren't necessarily the first thing I'd expect to happen.) so I don't see anything that really NEEDS to be conidered non-canon to keep the lore from becoming a huge mess. Obviously, we can't be completely certain that it will still be taken into account by future games, but right now, I see no reason it wouldn't be, so yes, I'd say the Infernal City is probably canon.