Onions contain a compound which is toxic to the red blood cells of cats. The red blood cells are destroyed and this results in anemia. The specific type of anemia is called 'Heinz body anemia' because the red cells develop an abnormality called a 'Heinz body' which can be seen under the microscope.
Dug, the dog, is easily distracted by ... squirrels (well, he's easily distracted by everything, but especially squirrels). He can be talking (yeah, it's Pixar/Disney so the dog talks) & right in the middle of the sentence, he shouts, Squirrel!. Then he carries on with whatever he's talking about.
The trope plays on our knowledge of the tendency of any predator to be distracted by sudden movement by perceived prey and in particular our familiarity with dogs and their relationships with squirrels. You can see a clip with the scenes from the film Up, here. And the clip from the Daily Show, here.