CRA states that the adjusted cost basis of a life insurance policy is “a reasonable proxy” for its cost

An individual transferred a life insurance policy, having a nil adjusted cost basis and cash surrender value to his company for nil proceeds, and then the company within the following three years gifts the policy to a registered charity at a time the policy has a higher adjusted cost basis and even higher fair market value. S. 248(35)(b)(i) deems the FMV of property that has been gifted by a taxpayer within three years of its acquisition to be equal to the lesser of its FMV and its cost (or of its adjusted cost base in the case of capital property, or of its adjusted cost basis in the case of a life insurance policy respecting which the taxpayer is the policyholder) for gift-receipting purposes. However, in this context, s. 248(36) deems the cost or adjusted cost base of the property to be the lower of its cost or adjusted cost base to (i) the taxpayer and (ii) any non-arm’s length person from whom it was acquired during the three-year period preceding the gift.

There is a gap in the wording of s. 248(36) - it refers only to the cost or adjusted cost base of property – and not to the adjusted cost basis of a life insurance policy. CRA is not flummoxed by this and states that the adjusted cost basis:

of an interest in a life insurance policy, as defined in subsection 148(9), is generally a reasonable proxy for the "cost" of an interest in a life insurance policy for purposes of subsection 248(36).

Accordingly, the company’s gift to the charity is deemed by s. 248(35)(b)(i) to have a nil value given that s. 248(36) deems the “cost” to the company of its gifted property to be the nil adjusted cost basis it had to the individual.

Neal Armstrong. Summary of 18 May 2017 CLHIA Roundtable, Q.4, 2017-0692361C6 under s. 248(36).