Melee really seemed to push it the most-- the bit in the intro with Mario, the character intros using trophy stands, but they all do kind of push it to an extent.
And it would really make things like Olimar being roughly the size of Pikachu and Rosalina using her Luma as a flesh puppet of terror/Peach using Toad as a literal shield make much more sense.
The size differences are just gameplay-story segregation, Nintendo breaks canon sizes all of the time to make characters work in gameplay. I'm pretty sure Rosalina hasn't been 7'7" since Galaxy 2. Maybe in Mario Golf, but most games size her down to make her work for gameplay. In Super Mario 3D World, for example, all 5 playable characters are roughly the same size, so that giving them the same hurtbox/hitbox data is possible.
Rosalina & Luma fighting together has canon basis, in that "the Lumas will sacrifice anything to protect their mother", as said in the Palutena's guidance. The Lumas are not being controlled by Rosalina, they are independently fighting by her side.
Peach pulling out Toad to protect herself is perfectly in character. The entire premise of her character is that she's the pampered princess who always has someone waiting on her, especially Toads and Mario.
------
I believe the "characters are actually toys" concept to be true in 64 and Melee, but not in Brawl and Wii U/3DS. There are too many nods to the characters' past, as well as the Subspace Emissary in Wii U/3DS, for me to accept this even if Iwata says this is the case.
However, I believe Amiibos represent the concept in Wii U/3DS. If you play as Mario, you're playing as the real deal. Same with CPUs. However, a Mario Amiibo is obviously a toy of Mario brought to life.
In a nutshell, 64 and Melee portrayed the characters as toys (even the Trophy Hoard in Melee was a room), Brawl had the real characters and turning into a trophy was equivalent to death, and Smash 4 has the real characters, but still represents the original "toys brought to life" concept through Amiibos.