On a very technical basis, the law requires a taxpayer to file Form T2091 with his personal tax return for the year in which he sells his principal residence in order to designate the years that are being used in the exemption calculation. However, the CRA has stated in its policy and Interpretation Bulletin IT-120R6 paragraph 7 that you do not need to complete this form unless there is a taxable capital gain after using the principal residence exemption. This administrative relief does not apply where an individual has made the 1994 election to utilize his $100,000 capital gains exemption.
Where the principal residence exemption fully eliminates a capital gain, a designation of the property is considered to have been made for the years necessary to eliminate the gain.
For those situations where an individual owns two houses at the same time, there is an assumption as to which years were sheltered by the principal residence exemption based on the amount shown on the tax return. For example, if an individual owned two houses at the same time and sold one in Year 1 and the second one in Year 4, if the gain in Year 1 was not reported on the tax return, then it would be assumed that the second house was not a principal residence during the years when the first house was owned.
The CRA could technically challenge an individual as to whether the T2091 has been filed. However, in a review of case law, the form has only been brought up when there are other matters to be dealt with.
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