1/2. Elite schools may not like it, mid-tier schools may not like it or they may not care.
3. no, make the priority passing.
4. Apply early, first day. As stated above, some schools will not like a conditional/C/P after conditional. Call the 2/3 programs you are most interested in, most ppl apply but do not call. This simple gesture will bode well for you.
Take the shelf on a lighter rotation, as you were advised. Use it as a bridge to continue your studies and try to kick butt on Step 2.