I have created an Update Status Activity Notification for the out of the box 'Cancelled' status but it is not working, the notification is not sent.
The steps are the correct ones as same steps are working for other statuses :
Administration Tab - Notifications - Activity Notifications - Update Status
and in the out of the box Notification Rule, select i.e. a Contact to be notified.
While notification is being sent when incident is updated with other statuses, when updated with 'Cancelled' status, the notification is not sent.