H1B petition is filed by the employer. Employee's residence is immaterial for the petition. They want to know where the employee will work and that must be a US location because you don't need to petition to USCIS if someone wants to work in Canada. As for 'extension of stay' which is a secondary part of the petition. If the petition requests extension of stay, that means the employee is physically living in the US and wants to extend their I-94. In case of commuters, this second part of the petition may be denied if the I-94 submitted with the petition is no longer the most recent I-94. A lot is at the discretion of the officer at this point because USCIS views this extension of stay as a 'benefit' that is given to the employee. They can potentially deny this benefit and approve the petition as consular notification. It is totally discretionary. If that happens, all you will need to do is to arrive at the US border with the new petition and valid visa (previous or new) and voila you have a new I-94. From that point on, you can use AVR to continue your commute. But always note that even entry to US is a benefit. As a non-immigrant, CBP has full authority to deny you entry, but they are very less likely to do that for any of these reasons.