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How did your wife become Canadian citizen?
Did she come to Canada with her parents as PR and applied for citizenship afterwards?

or was she burned outside of Canada to Canadian parents?

See the first few post in this thread.

OP said his wife is naturalized Canadian citizen.
 
See the first few post in this thread.

OP said his wife is naturalized Canadian citizen.
OP said that his wife is naturalized, but it's not clear if he understood what it means, and the difference between 'generation' in general, and 'generation born abroad', which is what affects the eligibility for citizenship by descent.

In post #13, the OP states that his wife is "1st Generation Canadian (Naturalized)". If she was naturalized, then the child would be the first generation born abroad, and a citizen by descent if born outside of Canada. However, the OP then states "Her baby is a second generation if it is born outside of canada and would not be eligible for citizenship", which would only be true if the wife was not naturalized, but had gained citizenship by descent herself. @YVR123 tried to explain this to the OP, but the OP has not responded; hence the ambiguity from @andrew3081.

So to clear this up, @solman07 needs to just answer this one question:

How did your wife become a Canadian citizen?
  • If her parents were Canadian citizens at the time she was born, then she would be a citizen by descent and deemed to be the first generation born abroad. If born outside of Canada, the child would be considered second generation born abroad, and ineligible for citizenship by descent from your wife.
  • If she immigrated to Canada with her parents and became a citizen with them, then she would be a naturalized citizen. If born outside of Canada, the child would be deemed to be the first generation born abroad, and eligible for citizenship by descent from your wife.
 
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If your wife is a naturalized Canadian citizen your baby will not be eligible to receive Canadian citizenship.
This is incorrect. If the wife is a naturalized citizen, then the child be considered first generation born abroad, and would be eligible for citizenship by descent.

So, if the baby is born outside Canada and then moves there with you they'll be able to get residency BUT if they have kids outside of Canada they won't be able to pass on their Canadian citizenship.
This is also incorrect. If the child obtains residency and becomes a Canadian citizen, it will be done by naturalization. Any children born outside of Canada to him/her will be eligible for citizenship by descent as a first generation born abroad to the naturalized citizen-parent.