No, she alive, you clearly tell by looking at the teary eye. I think this is sort of like Nightmare Rarity from the comics. Only instead of Rarity being trapped in a Nightmare version of herself, Rarity in a possed..............





Oh hold even better possiblity was Spike was messing with spells and brought his Rarity Plush to life, and she tired to replace Rarity, by taking over her body.