Can I use a grinding stone on a nut on the starter? Will the sparks create a fire? Was gonna put tin foil around it, but it won't catch all of them

Is the nut corroded on, or was it cross threaded? If corroded, use one of many available penetrating oils to loosen the corrosion. If cross threaded, I would definitely avoid causing sparks if you are not a professional in a proper auto shop with proper clearance, access and safety materials. No one in this forum could ever suggest it would be the best idea to use a Dremel tool and generate sparks.

IF you’re having a problem accessing & removing the retaining nut using the correct tools - I doubt you’ll be able to get the Dremel tool in place to do any cutting anyway as it will certainly have more bulk that the required hand tools. I can’t fathom not being able to remove the bottom retaining nut in the first place - unless maybe the proper ‘quality’ tools aren’t within your arsenal.. Good luck with it !