We had a similar issue in our primary bathroom. The tile floor is higher than the surrounding wood floor from the hydronic radiant heating under our tile. Our contractor installed a Schluter metal trim piece and then cut a piece of wood to ease the transition between the tile and wood floor. Without the wood transition I was afraid we'd break our toes if we hit the metal trim in the middle of the night!

are you on a slab? I don't have flooring under my cabinets. just make sure if yours will be sitting on slab, they account for the height diff w/the new flooring.

I also vote for tile. You don't need to go up the wall behind the toilet with it - although if you have boys, I change my answer to yes, take it up the wall. :-) Maybe a wainscott all the way around the room? It doesn't have to be the same tile as what is on the floor, in fact it might look better if it wasn't.

You are showing the exterior. I assume from your post you are speaking of the step being to the interior. If this is correct please post a picture from the inside.