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OK, that snap ring secures the lower crank bearing in place, not the driveshaft. So yes, the splines have rusted, the crank and driveshaft splines are seized together. That housing is the lower crankcase seal housing and oring. For now, I would slide it back into place to avoid getting any debris on that lower bearing. At least, pack that cavity with clean rags anyway. I would remove that inner exhaust housing, you will want to check and replace those water tube grommets anyway….
Now, I would clamp the driveshaft in a large vise with the powerhead hanging upside down below the vise. Rig up some sort of shims/blocks so you can apply wedge pressure between the bottom of the powerhead and vise pushing downwards on the powerhead. (have something directly near/below the powerhead so it doesn’t fall far when the splines releas…
I would get a decent air hammer directed to the side of the driveshaft while applying downward pressure on the powerhead, this usually does the trick. This is a two person job, be careful not to damage the machined surfaces of the powerhead while prying by using some sort of heavy metal spacer between the base of the powerhead and pry bar.
Once the powerhead has separated, you will want to clean the internal splines of the driveshaft completely, make sure they are not badly worn. I would replace the lower seal (there may be two seals in there if there is no oring/groove on the driveshaft), oring and snap ring as well.
Be sure to replace the driveshaft oring and lube the splines with OMC moly lube before reinstalling the gearcase….
Again, if you engine has an overheat issue, this may indeed be caused by crushed upper water tube grommets….