I'm sorry to hear about the drama you are living through and I'm glad that your 5yo nephew at least has you and his grandparents on which he can truly rely.
Welcome to SR.....if you read around the boards, you will find a lot of support and experience to share.
Remember that this is just my opinion: You have made a good step in setting a boundary for your sister (get help or get out). Is her use bad enough that your parents should try to gain guardianship of your nephew? It is also something to consider. Your sister will not stop using unless and until SHE decides to stop. One of the things you will learn at Nar-Anon or Al-Anon meetings is that you did not cause, you cannot control it, and you cannot cure the addict (the three C's).
Hugs and best wishes to you and your parents, I hope that your sister finds recovery for her sake and the sake of her son.
:ghug
HG