I had always seen Rare Candies in the Pokemon games, but had Ash or any other trainer used a Rare Candy. If it had been used in the anime give me the link to the episode.
According to Bulbapedia it appeared in Caterpie's big Dilemma: http://bulbapedia.bulbagarden.net/wiki/AG142
Yes, it has. It was a episode called Caterpie's Big Dilemma. Howevr, instead of making a Pokemon level up, it made the Pokemon larger (and uncontrollable).
Hope This Helped :D