what are you confused about......your spouse is living with you inside Canada.
if the applicant stay in Canada is temporary or a short stay and plan to go back to home country while the sponsorship application is been processed.......you may answer living outside Canada.......
Class of Application ......Outland......choose option 1.
1. I am currently living outside Canada, and I am applying under the Family Class.
however, if your currently out-of-status wife plans to live inside Canada while the sponsorship application is been processed and travel abroad only when convoked to attend an interview at a visa office outside Canada........you may answer living inside Canada.......note: applicant is currently out-of-status........
Class of Application ......Outland......choose option 2.
2. I am currently living in Canada, and I am applying under the Family Class (not under the Spouse or Common-Law Partner in Canada Class). I understand that I may be convoked to attend an interview at a visa office outside Canada.
you have to choose an option.....and its up to you what option.....good luck