This refers to someone who is in Canada without legal status either due to the fact that their temporary status has expired or due to entering the country illegally. (Usually it's the former.)
Yes, a person is still allowed to sponsor their out of status spouse, have a look here http://www.cic.gc.ca/english/immigrate/sponsor/spouse-apply-who.asp, under the heading "Sponsoring a spouse, partner or child":
You can apply as a sponsor if your spouse, common-law or conjugal partner, or accompanying dependent children live with you in Canada, even if they do not have legal status in Canada. However, all the other requirements must be met.