home sale

The FHSA rules for accumulating contribution room and determining carryforward amounts differ from those governing RRSPs and TFSAs, which could confuse clients who are more familiar with the established plans.

“Some FHSA holders will not understand the carryforward rules and end up putting themselves into an overcontribution position,” said Jacqueline Power, assistant vice-president of tax and estate planning with Mackenzie Investments in Toronto.

The CRA applies a penalty of 1% a month on the excess amount in an FHSA until it is removed or absorbed by new contribution room.

In the year someone opens an FHSA, they access $8,000 of FHSA contribution room. This contrasts with TFSAs and RRSPs, where contribution room accumulates regardless of whether someone opened an account or plan.

For the years following the year in which the FHSA is opened, an FHSA holder’s contribution room for the year is $8,000 plus unused contribution room, or carryforward, from the prior year, to a maximum of $8,000 and subject to the $40,000 lifetime limit.

For example, someone who opened an FHSA in 2023 but didn’t contribute to the plan that year would have $16,000 in contribution room: $8,000 in room from 2024 and $8,000 in carryforward.

However, unused contribution room “is not cumulative,” said Tonya Gennings, regional vice-president of financial planning for Western Canada, BMO Financial Group, in Calgary.

In contrast to TFSAs and RRSPs, where contribution room can be carried forward indefinitely (or until age 71 for RRSPs), “you can bring forward an unused $8,000 [FHSA contribution room], but no more,” Gennings said.

Consider someone who opened an FHSA in 2023 and contributed $4,000. For 2024, the FHSA holder would have $12,000 in contribution room: $8,000 in new room for 2024 and $4,000 in carryforward.

If the FHSA holder hypothetically contributes another $4,000 to the FHSA in 2024, they will have $16,000 in contribution room for 2025: $8,000 in new room and $8,000 in carryforward.

If the FHSA holder contributes yet another $4,000 in 2025, they would only have $16,000 — not $20,000 — in contribution room for 2026: $8,000 from 2026 and $8,000 of unused room from 2025.

At this point, the FHSA holder cannot use the $4,000 in contribution room from the previous year. However, they would receive $8,000 in new room in 2027, plus any carryforward amount from 2026, again to a limit of $8,000.

Year Contribution room + carryforward from
previous year (if applicable)
Example contribution
(for illustration purposes only)
Carryforward to
following year (max. $8,000)
2023 $8,000 $4,000 $4,000
2024 $12,000 $4,000 $8,000
2025 $16,000 $4,000 $8,000
2026 $16,000 $4,000 $8,000
2027 $16,000 $4,000 $8,000
2028 $16,000 $4,000 $8,000
2029 $16,000 $4,000 $8,000
2030 $12,000* $4,000 $8,000
2031 $8,000* $4,000 $8,000
2032 $4,000* $4,000 $0
*due to $40,000 lifetime limit. Contributions beyond the annual and lifetime limits would create an excess amount and can’t be deducted from income. For illustration purposes only.

Running out of time to use the lifetime $40,000 contribution room could also be an issue.  FHSA holders can no longer contribute to a plan after the earliest of three events: the end of the year of the plan’s 15th anniversary, when the FHSA holder reaches 71 or the year after the FHSA holder makes their first qualifying withdrawal.

Any contributions to the FHSA after the first qualifying withdrawal are not tax deductible.

In Bill C-59, which received royal assent on June 20, the federal government tweaked the rules governing the FHSA. Contributions made after the first qualifying withdrawal, but in the same calendar year, would also reduce the carryforward amount. The change ensures contributions made after a first qualifying withdrawal count for the purpose of applying the 1%-per-month penalty for overcontributions.

Overcontributions aren’t uncommon with new accounts. FHSA holders can open as many FHSAs as they like, but, as with RRSPs and TFSAs, their contribution room and carryforward amounts don’t change.

Some clients may have chosen to open accounts with more than one provider and inadvertently exceeded their contribution room, said Julie Petrera, senior strategist, client needs, with Edward Jones in Toronto: “If [clients] over contributed because of the multiple accounts that they didn’t disclose to us, that’s where we could see this happen.”

An FHSA holder can claim a deduction for contributions made to an FHSA within a calendar year. However, unlike RRSPs, contributions made during the first 60 days of a calendar year can’t be claimed for the previous tax year.

Institutions must provide FHSA holders with a T4FHSA slip, First Home Savings Account Statement indicating the total amounts they contributed to their FHSAs for the year (as well as any amount transferred from their RRSP to their FHSA).

A taxpayer must file Schedule 15 – FHSA Contributions, Transfers and Activities with their tax return if they open, contribute to, transfer to or withdraw or transfer from an FHSA in a tax year. They also must file if they claim an FHSA deduction. The CRA will then provide the taxpayer with their FHSA contribution room for the following year on their notice of assessment.

Gennings suggests clients work with their financial advisors to set up and track regular FHSA contributions so they don’t inadvertently undercontribute to the plan.

“With RRSPs or TFSAs, unused room gets carried forward indefinitely,” Gennings said. “[The FHSA] is a little bit different, which makes those regular contributions, I’d say, even more impactful.”

Overview of FHSA rules

The FHSA, a registered plan that launched last year, allows first-time home buyers to save for a down payment on a tax-free basis. Like with an RRSP, contributions to an FHSA are tax-deductible, while withdrawals to purchase a first home — including from investment income — are tax-free, like with a TFSA.

Contribution room begins accumulating only once an FHSA is opened. There is an annual contribution limit of $8,000 and a lifetime contribution limit of $40,000. Up to a maximum of $8,000 in unused contribution room can be carried forward to a future year.

An FHSA holder can also transfer funds from an RRSP to an FHSA, tax-free. However, such transfers are not tax deductible, as the deduction was previously available when the RRSP contribution was made, and don’t restore RRSP contribution room. Transfers from an RRSP to an FHSA can’t exceed the FHSA holder’s available contribution room at the time of the transfer.

A withdrawal from an FHSA to buy a qualifying home is a tax-free qualifying withdrawal. Any remaining funds in the FHSA may be transferred on a tax-free basis to an RRSP or RRIF until Dec. 31 of the year following the year of their first qualifying withdrawal. Non-qualifying withdrawals are included in the FHSA holder income in the year of withdrawal.

Both the FHSA and the Home Buyers’ Plan can be used to purchase the same home.