As for pulling out of the war if the USA declare war, after the USA have whipped themselves into a self-righteous jingoist war frenzy, sure, it can happen... if Canada is willing to meekily embrace its rightful destiny in the US, and London gives its blessing. I can totally see the USA calming down and throwing the Alliance to the wolves in this situation. Who knows, maybe Ontario and Western Canada might suffice.

Again, this is not to say that US intervention would be the most likely outcome, it does not by any means, but only to remark that a UK-US war in 1890-1918 was not so ASB as you make it seem.
Ah, but said jingoist fury would be against Britain, not Canada.
And despite what others feelings may be, Canada woudn't go to war with the States but wouldn't want to join them either.
There is no
Defence_Scheme_No.1 as it hasn't been created yet, and all of Canada's troops are in Europe.
Unlike Britain sometimes isn't, Canada's hand is always on America's pulse watching the way things go. As things go worse and worse between Britain and the States, Ottawa is going to be horrified.
With its troops in Europe, Ottawa really has no option. She will sue for peace and if nescessary, offer key economic terms to America.
The most likely would be an imposition of the
Reciprocity (free trade) treaty that failed to be signed in 1911.
Since a common view in the states was that this would lead to annexation eventualy, and far more jovialy, they would like this better.
Canada would also probably have to sever ties with Britain as well and turn itself into a Republic

.
This is really the only choice Canada has, other than annihilation. They'll do it.
Really, from an American perspective, this is the best.
It'd be a mostly Ottawa initiative to stave off annexation, and some reasonable propaganda could shift all the blame to Britain for forcing Canada into the situation.
There is no more British Empire in North America, instead a fellow republic that has now entered into a Free Trade agreement.
The states would also avoid any unwanted occupation, and it would be unfreindly due to the increase of pro-Britishness if America does invade, so they save lives in both invasion and occupation.
So in conclusion, America would:
-save lives from not having to fight
-give Britain a serious blow in resources and man power
-gain all the economic benefits from free trade
-install a fellow republic and remove all major British influence from North America
Oddly enough, this might make Canada more stable in ONE specific way, and that is Quebec.
If Canada was turned into a Republic, then she'd probably have to rewrite her Constitution due to entire British dominion deal. Quebec at the time was incredibly PRO-Canada, and desired all things to be Canadian, not British. They wanted a Canadian navy, a Canadian army, and all that jazz. They would of course have to sign due to the Federal nature of Canada, and this would of course kill any sense of legitamacy Quebec has to its seperatist dreams down the line. They would since this is almost a dream come true for most quebecois at the time, and Quebec would probably become in Canada the most pro-Republic of the lot.
This kind of solution I find most realistic and the most plausible. If this leads to American annexation later in some kind of referendum, maybe but I doubt it (not impossible, just my opinion). Canadian nationalism was already everywhere, so the cat's out the bag on that one. But really, America would reap all the benefits and none of the negatives.