1. Don't know anyone personally who got rejected, but there have been several people here who it did happen to. Mostly for not meeting financial or educational requirements or for having made errors in their applications.
2. There should be no problem with the US embassy. However, I am not sure how enthusiastic Canada is with deporting illegal aliens, but chances are you wont be able to get a police certificate since you are out of status. Means you would have to change to the embassy in your home country. Also means you will probably not be able to return to Canada for a long time.