Will a light to medium coat of rust on a flywhl magnet (not touching coil poles) cause a no spark condition?

No! it does not affect the magnetism from the magnets and will not cause the unit to stop working, it will however affect air gap settings, as you cannot get an accurate measurement for the air gap if you have alot of rust or corrosion on the magnets.

Had the same problem, cleaned off the rust, now how do I set the air gap?
Must be a simple way?

Use one or two business cards between the magnets and the coil laminations, loosen coil and let magnets draw it up against the cards, tighten it down and remove the cards by rotating the flywheel. Air gap is set. you can measure the cards with a dial caliper to see how thick they are, most air gaps are between .008" - .016" depending on the specs for your engine.

Thanks for the info.