It's in the guide: http://www.cic.gc.ca/english/information/applications/guides/3900ETOC.asp
Check one box to indicate how you wish to proceed if you do not meet the sponsorship requirements.
•If you check the box to withdraw your sponsorship application then
◦the sponsorship application will not be processed. All fees will be refunded, except for the $75 sponsorship fee.
•If you check the box to proceed with the application for permanent residence then
◦the sponsorship application will be refused. None of the fees will be refunded.
Note: Check “proceed with the application for permanent residence” if you submit an undertaking of assistance to support the permanent residence application of a family member or close relative on Humanitarian and compassionate considerations.
In other words, in practically all cases you check the box to withdrawal the application if sponsor if ineligible. You ONLY check the box to proceed if you have a humanitarian/compassionate consideration case.