Yeah well I get that the CN group gets protonated, but I can not see what happens next. The nitrogen is now positive, so I guess it will react with the lone pair of oxygen. But I am not sure which oxygen it will react with, water or ethanol? Am I right about this?
Okay, now I understand the confusion.
Q: Which oxygen is more positive, H3O(+), H2O, or HO(-)?
A: Neither, they are all plus 8. What has changed is the number of protons added to the electrons surrounding the oxygen atoms.
The formal charge of a protonated nitrogen simply means the electrons are being pulled away form the nitrogen. It still has 10 electrons and so resists addition of more electrons, just as the oxygen above does. The solution is to use one of the electron pairs shared by the C≡N bond or draw a -C(+)=N-H resonance structure. That should give a new target for electron attack.