1) Why would you proceed with the application if you are found ineligible to sponsor? Obviously nothing will happen without a sponsor. If you read your application guide at
http://www.cic.gc.ca/english/pdf/kits/guides/3900E.pdf you will see that at page 19 it tells you, if you choose to withdraw your sponsorship, you will get your fees returned. If you choose to continue, the file will be sent to local visa office where it will be refused, you will not get a refund but you can appeal.
2) In 6 b) they say "If the above address is not in the country of nationality of the person you are sponsoring..." which it is so this question is N/A and so is c). Cross over both b) and c) and write Not Applicable.