Whilst it does not even begin to surprise me that this piece of legislation is so poorly drafted that 'cancellation' is not defined properly, I don't see how the airline can get away with this.
A 'schedule change' on a short haul flight where the only alternatives are either 10 hours earlier than originally scheduled or 14 hours later has to entitle the passenger to some kind of redress. In order to accept the alternative, most people would have either had to take a full day off work/study, or accept a 14 hour delay.