1. I believe it is a combination of proximity and if I remember correctly, it looks for red pixels (red province borders). I will sometimes start with solid red province borders to give the map editor a chance to auto detect neighbors, but I often end up clearing it and doing it manually anyhow. (You can always change the border colors later in gimp by using the "select by color" tools.
2. You should have no problem making snowy maps. Just be sure to not use pure white. For example, try using a color like 255/255/245. It is still white, just not pure white.
It is often useful to use gimp to select all white pixels on your image before placing your province pixels and if any are found, just change all of them to some subtle variation of white.