I know that Canterlot was High up and has Higher Defences and the only way in was a Gate and the gate is a Mile away and the Train was only available except in war time, but Canterlot was Now Vulnerable to a Modecan Invasion because of There Advanced Technology, they had Paratroopers because they can Drop to Canterlot and they can Drop Tanks and Supplies there unless Equestria has some Anti-aircraft. Any Questions?
I always figured it was some kind of magical decoration or effect, because without a river, a waterfall makes no sense.
I suppose there could be a spring under the mountain that feeds out underneath the castle–but that’s a heck of a lot of water for a natural spring. Which brings me back around to it being magic.