Vinyl does a horrible job of stopping rain infiltration. I'd recommend leaving the cedar on and covering it with half-inch foil-faced RFBI, with the seams taped. That will provide the "flat surface" that's required by the manufacturer's installation instructions.
Building out the trim will be factor, but it can be easily made thicker by adding simple backbanding, which is probably the easiest way to go. Backbanding looks okay on fenestration, but on corner boards it's often best to build out the thickness of the entire cornerboard.