Castiel realizes that a dragon isn't built to know or care about these sorts of things, but so long as Toothless remains curious, he'll do his best to explain in a way that he can understand.

Earth is the world that you live on. Where you're from. Toothless' world may in fact have a different name, but it isn't important right now, so long as he understands the basic concept.

Heaven is another, different place that humans can only go to after they die. Not that something like Toothless would go there, but Castiel would rather not have to explain Purgatory to this beast.