CRA finds that the non-qualifying security rule in s. 118.1(13) effectively amends the wording of s. 70(5)

S. 118.1(5) deems a gift made under a will to be made in the deceased’s terminal year, so that the executor can then designate under s. 118.1(6) an amount (generally between the gifted property's adjusted cost base and fair market value) at which the property is deemed to be disposed of at the end of the terminal year.  However, s. 118.1(13) provides that where the gift was of non-qualifying securities (other than an excepted gift), there is deemed to have been no gift except for purposes of determining the securities' proceeds of disposition under s. 118.1(6).  This means that they are deemed to have been disposed of immediately before death under s. 70(5) rather than under s. 118.1(5).  However, s. 70(5) deems the securities to be disposed of for their fair market value rather than an ACB designation under s. 118.1(6).

CRA's solution to this dilemma: the non-qualifying securities are deemed to be disposed of immediately before death under s. 70(5) for the amount designated under s. 118.1(6).

Neal Armstrong.  Summary of 15 July 2013 T.I. 2013-0486701E5 under s. 118.1(13).