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U.K. Family have visa waiver for entry to Canada but on route to Calgary from Vancouver by hire car, we want to visit Seattle for three days. I know I can get visa waiver for US entry but as we are heading back up to Canada are we "in transit" in the US for purposes of the application form ?

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    What application form? The visa waiver should just involve turning up at the border and being given an I94 (and there may be a smal fee, not sure) – CMaster Jan 28 '16 at 9:38
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As you are entering the USA for the explicit purpose of sightseeing, it would be hard to justify that as "transiting". And since you are driving between two cities that do not require passing through the USA, it again would be hard to justify your trip as "transiting".

On the other hand if you were driving from Vancouver to Bellingham to catch the AMHS ferry to Prince Rupert, that would likely fall under transiting. (though CBP might wonder why you didn't take the BC Ferry ;-)

For your scenario, it would most likely be considered a visit, albiet a short one.

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No. "In transit" means e.g. you are flying from London via Chicago to Vancouver. So you are not really entering the USA.

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