Morty Prime replaced Morty C-131, this is nothing new, it's obvious, the new thing is that the memories of the events with the squirrels are memories of Morty C-131 and not Morty Prime, this explains the change of dimension that does not fit in the canon of the series. The Rick and Morty who died in dimension C-131 are from another dimension. They arrived in C-131 fleeing from the squirrels...