What is the best way to compare XML files for equality?

It really depends on what you want to check as "differences".

Right now, we're using Microsoft XmlDiff: http://msdn.microsoft.com/en-us/library/aa302294.aspx

You might find it's less fragile to parse the XML into an XmlDocument and base your Assert calls on XPath Query. Here are some helper assertion methods that I use frequently. Each one takes a XPathNavigator, which you can obtain by calling CreateNavigator() on the XmlDocument or on any node retrieved from the document. An example of usage would be:

     XmlDocument doc = new XmlDocument( "Testdoc.xml" );
     XPathNavigator nav = doc.CreateNavigator();
     AssertNodeValue( nav, "/root/foo", "foo_val" );
     AssertNodeCount( nav, "/root/bar", 6 )

    private static void AssertNodeValue(XPathNavigator nav,
                                         string xpath, string expected_val)
    {
        XPathNavigator node = nav.SelectSingleNode(xpath, nav);
        Assert.IsNotNull(node, "Node '{0}' not found", xpath);
        Assert.AreEqual( expected_val, node.Value );
    }

    private static void AssertNodeExists(XPathNavigator nav,
                                         string xpath)
    {
        XPathNavigator node = nav.SelectSingleNode(xpath, nav);
        Assert.IsNotNull(node, "Node '{0}' not found", xpath);
    }

    private static void AssertNodeDoesNotExist(XPathNavigator nav,
                                         string xpath)
    {
        XPathNavigator node = nav.SelectSingleNode(xpath, nav);
        Assert.IsNull(node, "Node '{0}' found when it should not exist", xpath);
    }

    private static void AssertNodeCount(XPathNavigator nav, string xpath, int count)
    {
        XPathNodeIterator nodes = nav.Select( xpath, nav );
        Assert.That( nodes.Count, Is.EqualTo( count ) );
    }

Doing a simple string compare on a xml string not always work. Why ?

for example both :

<MyElement></MyElmennt> and <MyElment/> are equal from an xml standpoint ..

There are algorithms for converting making an xml always look the same, they are called canonicalization algorithms. .Net has support for canonicalization.