DON'T apply inland - she's out of status and that means ridiculous timelines and absolutely NO ADVANTAGE to either of you. If you apply inland, the overstay becomes an issue and you're looking at a couple of years to even get her first stage of approval. She does
not have to be in the US in order to have her application processed outland through Buffalo, but she does have to leave Canada at some point in order to get herself back in compliance on the overstay. By applying outland she's enabled to do that, and then you accompany her back into Canada to ask that she be documented for temporary status to stay with you while the PR ap is processing. They're not going to know that she's overstayed since 2007 unless you tell them.
There's more details on the
US2Canada website. Check it out - especially the part about Visiting/Visitor Records. She's able to have her immigration medical done in Canada - even for an outland ap - and it's also possible to order an FBI clearance from Canada. And she'll need to order her passport - which can be done from Canada as well.
Here's the information.
I don't recommend that she leave Canada until after you have the PR ap in process - but she does have to leave in order to reinstate valid temporary status and be legal to stay.
Don't mention on re-entry that she's been here without status for 5 years - they'll turn her around for sure. The important point is that that technically all goes away as soon as she steps on US soil - but that doesn't preclude officers at the border from using it against her as proof that she will not comply with the requirement to leave or extend her status . . . if you reveal it! So leave it alone. As soon as you have your sponsorship approval letter, the two of you take a trip to the US for a few days, and then you accompany her back to Canada and ask that they document her on a Visitor Record - with proof of your marriage and your sponsorship approval as support. That will enable her to remain legally in Canada during processing of the outland ap, and will give her what she needs to
apply to extend her temporary status (the VR) from within Canada if her PR has not been approved by the time it's due to expire. US citizens in Canada can actually accomplish the entire outland PR process without having to leave Canada, as long as there is sufficient evidence included with the application to support the "genuine" relationship so that the interview is waived.
The biggest piece is to get the PR sponsorship in process - then straighten out her temporary status and DON'T let it expire again!