For the Coloured Sugar, place sugar in large resealable plastic bag. Add food colouring. Seal bag. Knead sugar to distribute color. Add water; seal bag and knead again until the color is evenly distributed. Spread colored sugar on a large rimmed baking sheet. Let stand 25 to 30 minutes or until sugar is dried. Spray 13 x 9-inch (33 x 23 cm) baking dish with no stick cooking spray then coat with some of the colored sugar. Set aside.
For the Marshmallows, microwave sugar, 1/2 cup (125 mL) water, and honey in medium microwavable bowl on HIGH 7 minutes. Stir to dissolve sugar. Microwave on HIGH 5 minutes longer. Carefully remove hot bowl from microwave.
Place remaining 1/2 cup (125 mL) water in large mixer bowl. Sprinkle with gelatin. Let stand 5 minutes. Gradually beat in hot sugar mixture with whisk attachment on medium-low speed. Beat 8 minutes. Increase speed to medium-high. Beat 10 to 12 minutes longer or until mixture is fluffy, shiny and at least tripled in volume. Beat in vanilla.
Spread marshmallow mixture in prepared pan. Smooth top with a spatula. Sprinkle some more of the colored sugar on top to coat. Let stand at room temperature overnight or refrigerate at least 3 hours. Reserve remaining coloured sugar in large resealable plastic bag or airtight container.
Cut marshmallows with 1- to 2-inch (2.5-5 cm) Easter cookie cutters. Add marshmallows in batches to reserved colored sugar in bag; toss to coat well. Shake off excess. Store marshmallows in airtight container at room temperature up to 3 days.