According to this article last year with Hubpages.com CEO, switching from directories to sub domains had the greatest affect on ranking positively after Google's panda algortihm update killed content farms
http://www.zdnet.com/blog/foremski/hubpages-ceo-on-googles-panda-algorithm-seo-doesnt-work/1928
You could always do a 301 perm redirect from
www.newproject.com/winnipeg/
to
winnipeg.newproject.com
to help with people remembering
Bottom line: I would go with sub domains, but there is more configuration involved and you will have to make sure sessions are configured correctly to be able to move between the domains without needing to re-authenticate, etc..