To make it clear passport request form states:
do not submit your passports at this time if you intend to give birth to or adopt a child prior to your landing in canada. (If you are expecting a child and are able to land in Canada before the child is born, you should do so. Failure to land before additional dependents are born will result in the need for a new application and new fees for all family members).
This is what confused me and in a mad rush i sent the passport in. This also answers my question regarding the fact that i have to land before baby is due for sure. What is my next steps since i havent advised CIC yet and how to carefully handle this?
This quote above is for people applying for PR but your baby will inherit your citizenship and so it does not really matter in your case.
If your wife lands before the baby is born, no issue. If she lands after the baby is born, she can take with her a new copy of the additional family information form where the new baby is included and tell them when she lands that she has a new baby which is however a Canadian citizen and therefore not included in her PR application.
To verify the citizenship of your baby, you can apply for a citizenship card and ask for it to be expedited because you are moving to Canada very soon. After having applied for the citizenship card, you can ask the embassy to issue a temporary passport for the baby so it can travel with you to Canada.