timecapsule kills internet/wifi connection, when starting backup?

If you hold down an "option" key while you pull down the Wi-Fi/AirPort menu bar item, what value do you see for "RSSI"?

If you update your "Profile" (under "My Stuff") to include the version of OS X you're using and the details of your hardware, you won't have to keep typing them into your messages.

That value of RSSI is low but should be usable. A presuming a noise value in the range of -90, that gives you a signal-to-noise value of 30, which according to this Web page could be described as a "very good signal". On the other hand, I consider the RSSI value of -65 that I get to be low enough that I depend on an Ethernet connection instead. In any case, a Time Machine network backup consumes a lot of bandwidth, which seems to be causing problems with the rest of your network.

In that same Wi-Fi menu display, what band (opposite "Channel") do you see?

Unless you're backing up more than one device, a Time Capsule is a rather expensive Time Machine device.

That display shows that you're connecting over the 2.4 GHz band, which tends to be slower with an ideal connection, but tends to hold up better over distance and through interferences such as walls.

Is there any way you could connect your iMac to the Time Capsule with an Ethernet cable, at least long enough to run a test of a Time Machine backup. Before you run such a test, be sure that there's an Ethernet connection item in the list in the Network panel of System Preferences. To assure that you're using the Ethernet connection, you might also want to turn off the iMac's Wi-Fi feature.

Still another option might be PowerLine equipment. For less than the cost of an AirPort Extreme you could have near-Ethernet speeds without the need for a cable.