The Mg–Zn–Y alloy system is rich in intermetallic phases and several stable ternary intermetallic compounds including an icosahedral quasicrystal phase (I phase) exist near the Mg–Zn edge, making the system promising for developing Mg-based light metallic alloys with a large variety of candidates of intermetallic reinforcement phases. Detailed information about phase equilibria in the alloy system is critical for cost-effective alloy development. This work attempts for the first time to thermodynamically model the Y–Zn and Mg–Zn–Y system using the CALPHAD method. A full thermodynamic description of the Y–Zn system has been established, and for the ternary system efforts have been focused on regions near the Mg–Zn edge where the important icosahedral phase exists. The resultant thermodynamic database is then applied to case studies of experimentally observed microstructures, showing that the thermodynamic description of the present work offers a valuable working basis for alloy design of advanced magnesium based materials with intermetallic phases as reinforcements.