CRA warns taxpayers against FHSA excess amounts

The Canada Revenue Agency (CRA) is reminding taxpayers not to overcontribute to their first home savings accounts (FHSAs), given the tax implications.

“Any amount that exceeds your participation room is called an ‘excess amount,’ and it may be taxed,” the agency said in a release Tuesday.

Participation room is the total amount that an FHSA can hold in a given year. When a client opens their first FHSA, their participation room is $8,000. Each year after the account is opened, they get another $8,000 of participation room, as long as they stay within their limit each year, the release said. (A taxpayer doesn’t get more participation room by opening more than one FHSA.) The lifetime limit for an FHSA is $40,000.

After a client opens an FHSA and files taxes for that year, they’ll receive a statement on their notice of assessment letting them know how much participation room they have.

Overcontribution is the result of a client contributing or transferring (from RRSPs) more into an FHSA than their FHSA participation room for that year allows.

“Take swift action to resolve the issue,” the CRA said. “Don’t let your growth be impacted by taxes.”

Generally, the tax a client must pay is 1% per month on the highest excess amount in the account in the month. Tax continues to apply each month until the excess is removed or absorbed by new participation room when a new calendar year begins.

The CRA’s release also noted that an excess FHSA amount at the end of the year affects the client’s FHSA participation room for the following year. For example, if a client opened an FHSA in 2024 and contributed $10,000, their participation room for 2025 would be $6,000.

To fix an overcontribution, the taxpayer can make a designated withdrawal, or a designated transfer back to an RRSP if applicable, to get the FHSA within the annual limit (the filled-in RC727 is given to the financial institution). A designated withdrawal or transfer isn’t required to be included in the FHSA holder’s income.

A client can also remove the excess amount by withdrawing it from the FHSA, but that withdrawal will be taxable.

When a taxpayer has an excess FHSA amount, they must report it using form RC728 and RC728-SCH-A. Any tax payable is due by June 30 of the year following the year in which the FHSA taxes are payable (late-filing penalties could also potentially apply). The CRA said it may send a notice of assessment when a taxpayer doesn’t file the forms on time, and as such, it suggested taxpayers sign up for email notifications in their CRA accounts.

The FHSA, which launched in April 2023, is a registered plan that allows first-time homebuyers to save for a down payment on a tax-free basis. As with an RRSP, contributions to an FHSA are tax-deductible, while withdrawals to purchase a first home — including from investment income — are tax-free, as with a TFSA.

Unused participation room for a year may be available for the following year, to a maximum of $8,000 and subject to the $40,000 lifetime limit.