For Canadians, a valid passport is already required for those planning on entering the United States via Air, such as an international flight from Toronto to Seattle. However, a passport would NOT be required if you were to drive across the border to Buffalo and then take a flight to Seattle from there. This is as of 2008.

2012 FYI: I did end up getting charged the $25 annual fee, it just worked out that I got charged it as late as possible as it was charged on your anniversary date. The fee is rebated in future years as long as you do $1000/year, but you can't avoid getting dinged for it at least once.