You would sue in a Canadian Court as this is where you journey began and it is in this jurisdiction that you purchased the ticket. The small claims court link on the website I provided gives you advice and information on how to do this.
It is not a complicated as you may think. Read this...
http://www.airlinecomplaints.org/showthread.php?t=5672
As regards 261/2004, don't get hung up on detail. You had a booking for a flight from Rome to Valencia. The airline failed to deliver this at the time booked and in these circumstances the airline is responsible for your "care" and for refunding any additional expenses. On that basis.. you have a claim.