CAP is the tier that is used to play with the Pokemon that Smogon's community created as part of their "Create a Pokemon" project.
>The Create-A-Pokémon project is a community dedicated to exploring and understanding the competitive Pokémon metagame by designing, creating, and playtesting new Pokémon concepts.
Basically, it works just like standard OU, except the Pokemon Smogon has created are allowed in teams. Basically, Smogon creates Pokemon, and the community votes on which ones they'd like to see used. Once done, the Pokemon selected becomes available in the CAP game.
The main reason for the game is to see how new creations effect the OU metagame and what changes Pokemon with certain abilities could make (and of course to entertain everyone).
You can read more about the Create a Pokemon project here on Smogon (it's just slightly out of date, but it'll give you an explanation of the game at least).