Rulebook claims that you cancel damage when it is applied. Can you cancel damage at any other time or canceling damage works only at the moment of applying it? I need some clarification. What's the definition of canceling damage? When do you cancel damage? What's the difference between canceling damage and healing?

I'm asking mainly because of "Contested Fortress" card. Rulebook and FAQ are not clear enough for me.

When you deal damage to a unit or capital zone, you first assign the damage (placing the damage tokens in front of the card/zone), then you apply it (moving the damage tokens on the card/zone). When it's combat damage, you have a whole action window in between these two steps. For non-combat damage, there's no action window in between, but for both combat and non-combat damage there's what you might call a micro-step in between, during which damage can get moved or canceled. So if you assign two damage to a unit with toughness 1, during that micro-step one gets canceled and then you only move the remaining one on the unit.

Contested Fortress basically gives your capital toughness 1, but only once per turn. The toughness of units works an unlimited number of times per turn, every time they get dealt damage.

So damage cancellation happens in betweens assigning and applying damage. Healing on the other hand means removing damage tokens that have been placed on a card or zone. You cannot use a healing effect to save a unit that has been assigned enough damage to destroy it, because healing can't affect damage tokens before they are moved on the card, and once enough are moved on the unit, it is immediately destroyed, before you would have a chance to heal it. But if after applying damage it is still alive due to not having as many damage tokens as it has hit points, you can use healing to remove damage tokens.

Not to be nit-picking, but does the damage cancellation not actually trigger and resolve within the Apply Damage step, rather than between the Assign Damage and Apply Damage steps (which would be the action window)?

The rules say:

5. Apply Damage
Both players now apply the assigned damage to the
cards to which it has been assigned. At this point,
effects like Toughness (see Toughness, page 16) kick
in and cancel damage before it reaches the target.
Any damage tokens thus cancelled are returned to
the pool in the centre of the play area.

Yeah, but since applying damage means moving the assigned damage tokens on the card/zone, I just think it's easier to think of it as happening just before damage is applied, because canceled or redirected damage tokens don't make it on the card. They are (re)moved before they're actually applied (before they reach the target, as the rules put it).

Yes, in practical terms this is easier to understand.

Mallumo said:

Doesn't moving damage has the same restriction as healing at this point? You must first have damage on unit to move it elsewhere; so only cancelling or redirecting can save the unit, not moving (like "douse the flames") or healing. (or by "moving" you only meant physically moving tokens, not card effect of moving damage? )

Yes, of course. It should have been "redirected" instead of "moved" in the first paragraph. My bad.