Personal finances

Taxpayers who overcontributed to their FHSAs now have the form needed to report their overcontributions and pay the resulting tax.

On Thursday, the CRA released the return that needs to be filed when an FHSA holder has tax payable in relation to their FHSA, as well as the schedule attached to that return when the FHSA holder has overcontributed.

An FHSA holder must file the four-page First Home Savings Account Return and pay any tax by June 30 of the year following the year in which there are FHSA taxes payable.

Taxes may be payable in relation to a FHSA when the holder has overcontributed, the account holds non-qualified investments and/or prohibited investments, or the account runs afoul of the advantage rules. Those rules target certain abusive tax planning transactions involving registered plans.

An FHSA holder must calculate their tax owing on any excess amount in the FHSA on the eight-page Schedule A, Excess FHSA Amounts for each month beginning in the month the FHSA holder made their first transaction in the year and include the total in the FHSA return. The completed Schedule A must be filed with the FHSA return.

The CRA charges a penalty of 5% of the balance owing if the return is filed late, plus 1% of the balance owing for each full month that the return is late, up to 12 months.

An FHSA holder will be charged compound daily interest on a balance owing and on any penalties starting July 1.

However, as June 30 is a Sunday, and July 1 is Canada Day, the 2023 FHSA return is due July 2, 2024.

The FHSA, launched in April 2023, is a registered account that allows first-time homebuyers to contribute $8,000 a year, and up to $40,000 over their lifetime, toward a down payment.

Contributions to the account are tax-deductible and can be carried forward indefinitely. Withdrawals from the FHSA, including growth, are tax-free when used to buy a first home. The account can remain open for up to 15 years or until age 71, whichever comes first. Any money in the FHSA not used to buy a home can be transferred to an RRSP without affecting contribution room, or withdrawn on a taxable basis.

In the year a person opens an FHSA, they can contribute $8,000 without incurring a tax on excess contributions. A maximum of $8,000 in unused contribution room can be carried forward.

If the holder exceeds their FHSA contribution limit for the year, the FHSA holder is charged a tax of 1% per month on the highest excess FHSA amount for each month as long as the amount is there. The excess FHSA amount can be reduced or eliminated by gaining new FHSA room (on January 1 of the following year), or by the FHSA holder removing amounts.

An FHSA holder can request a waiver by filing a Request for Waiver or Cancellation of Tax on your Excess FHSA Amount. The CRA first released the waiver or cancellation form in February.

While registered plans, including FHSAs, can hold a wide range of investments, certain investments — including land, general partnership units and cryptocurrency — are generally considered non-qualifying. (A cryptocurrency ETF is qualified if it’s listed on a designated exchange.)

A prohibited investment is property to which the account holder is “closely connected.”

A registered plan that acquires or holds a non-qualified or prohibited investment is subject to a 50% tax on the fair market value of the investment at the time it was acquired or became non-qualified or prohibited. However, a refund of the tax is available if the property is disposed of, unless the account holder acquired the investment knowing it could become non-qualified or prohibited.

Income from a non-qualified investment is considered taxable to the plan at the highest marginal rate. Income earned by a prohibited investment is subject to an advantage tax.

A non-qualified investment that is also a prohibited investment is treated as prohibited.

An advantage tax is assessed where the account holds investments or makes transactions that are structured to artificially shift value into or out of the account or to result in certain other supplementary advantages.

The advantage tax is calculated as 100% of the fair market value of a benefit, a debt or a registered plan strip, depending on the circumstances.