My client put too much into their FHSA. How is the overcontribution taxed and how do we fix it?
In 2026, an FHSA overcontribution is taxed at 1% a month on the highest excess FHSA amount in each month, under ITA 207.021, until new January room absorbs it or your client removes it with a designated withdrawal or transfer on Form RC727. The tax goes on Form RC728 with Schedule A, due June 30 of the following year.
How is the excess FHSA amount measured?
Section 207.021 charges a tax of 1% of the highest excess FHSA amount your client has at any time in a calendar month, for every month an excess exists laws-lois.justice.gc.ca. The CRA describes it the same way: 1% a month on the highest excess, until new room on January 1 or a removal eliminates it
canada.ca. A partial month counts in full, and there is no allowance: the first dollar over room is taxed.
The excess is a running total, defined by the formula A + B + C − D − E − F in subsection 207.01(1) laws-lois.justice.gc.ca.
| Piece | What it is |
|---|---|
| A | The excess at the end of last year (nil before the first FHSA was opened) |
| B | Contributions made this year, up to that moment |
| C | Direct RRSP transfers into the FHSA this year (Form RC720) |
| D | The year's limit: the lesser of $8,000 plus the carryforward, and $40,000 minus what has been or could have been deducted |
| E | Designated withdrawals and transfers this year, plus taxable withdrawals |
| F | Earlier taxable withdrawals that didn't reduce an excess |
Two things follow. An RRSP transfer counts against room exactly like a contribution, so a client who moves $5,000 from an RRSP after contributing $8,000 is $5,000 over. And because D resets each January, an excess left in the account shrinks automatically when the new year's $8,000 arrives. Room rules themselves are on the FHSA rules page.
What does a $5,000 excess cost under each fix?
Take a client who opens a first FHSA on March 10, 2026 and contributes $8,000, then transfers $5,000 from an RRSP on June 3, 2026. From June 3 the excess is $5,000, so the tax is $50 for every month it stays. You spot it on September 12.
| Fix | Months taxed | 1% tax | Added to income | 2027 room |
|---|---|---|---|---|
| Designated transfer of $5,000 to the RRSP, completed September 22 | June to September (4) | $200 | $0 | No excess carried in |
| Plain withdrawal of $5,000 on September 22, no RC727 | June to September (4) | $200 | $5,000 | No excess carried in |
| Leave it until January 1, 2027 | June to December (7) | $350 | $0 | $3,000 |
The designated transfer is the clean fix: it isn't included in income and doesn't affect the client's unused RRSP deduction room canada.ca. The plain withdrawal stops the tax just as fast, but a withdrawal that isn't designated is a taxable withdrawal, included in income and subject to withholding
canada.ca.
Waiting costs $150 more and eats next year's room. The CRA's own example is the same numbers: Karla puts $13,000 into her FHSAs in 2026 against $8,000 of room, and her 2027 room drops to $3,000 canada.ca. In the CRA's shorter example, Carolyn's $2,000 excess from a November 15, 2025 contribution cost $20 for November and $20 for December, and her new 2026 room cleared it on January 1
canada.ca.
Which designation can your client make on Form RC727?
Your client designates the excess on Form RC727 and gives it to the FHSA issuer canada.ca. A designation can't be more than the excess at that time, and what is allowed depends on how the account was funded
canada.ca.
| Account funded by | Allowed designation | Cap |
|---|---|---|
| Contributions only | Designated withdrawal | Total contributions less earlier designated withdrawals |
| RRSP transfers only | Designated transfer to an RRSP or RRIF | Total transfers less earlier designated transfers |
| Both | Either, or a mix | Each cap applies separately |
The CRA's examples show where clients get stuck. Cristina only ever contributed, so when she asked for a designated transfer to her RRSP she was told she must make a withdrawal instead. Bailey only ever transferred from an RRSP, so her $5,000 excess went back by designated transfer canada.ca.
On the T4FHSA, the issuer reports a designated transfer in box 36 and a designated withdrawal in box 38, separately from a taxable withdrawal in box 22 canada.ca. Check the slip: an excess pulled out as box 22 means the RC727 never reached the issuer.
When are Form RC728 and the tax due?
Your client files Form RC728, the FHSA Return, only in a year they owe FHSA tax, and attaches Schedule A for an excess. The return and the payment are both due June 30 of the year after the tax arose, so tax on a 2026 excess is due June 30, 2027 canada.ca. The Act says before July of the following calendar year
laws-lois.justice.gc.ca.
Schedule A works out the excess amounts subject to the 1% tax canada.ca. As of October 2026 the current versions are the 2025 RC728 and Schedule A
canada.ca. If the holder dies before the due date, filing and payment move to the later of June 30 and six months after the date of death.
Miss the date and a penalty and interest apply, with interest running until the balance is paid. If no RC728 is filed, the CRA can assess the tax from issuer information, and it can reassess within three years of the notice of assessment canada.ca.
When will the CRA waive the 1% tax?
Subsection 207.06(3) lets the Minister waive or cancel all or part of the tax if the excess arose from a reasonable error and the excess, plus income reasonably attributable to it, is distributed from the FHSA without delay laws-lois.justice.gc.ca. So the request only works after the excess is out.
The request goes on Form RC729 canada.ca with FHSA statements showing when the excess arose and when it was removed, plus documents that support the reasonable error. Send it to the Sudbury or Winnipeg Tax Centre FHSA Processing Unit based on your client's address, by fax, or through their CRA account
canada.ca.
A waiver is separate from taxpayer relief. Penalties and interest on a late RC728 are relieved through Form RC4288, and only for circumstances beyond your client's control within the last 10 calendar years canada.ca.
What happens to your client's FHSA deduction?
An excess you designate as a withdrawal can't be deducted in any year. In the CRA's example, Stephanie contributes $11,000 against $8,000 of room, designates the $3,000 excess as a withdrawal and deducts $8,000; the $3,000 is never deductible canada.ca.
An excess built from RRSP transfers cuts the deduction too. Janella has $8,000 of room, contributes $5,000 and transfers $5,000 from her RRSP, leaving a $2,000 excess, and her deduction is only $3,000. And contributions above the $40,000 lifetime limit are never deductible canada.ca.
Sources
Does new room on January 1 fix the excess by itself?
Does a designated transfer back to the RRSP use RRSP room?
No. A designated transfer from the FHSA to an RRSP or RRIF isn't included in income and doesn't affect the client's unused RRSP deduction room canada.ca. It is only available up to the amount that came in by RRSP transfer.
Is the FHSA penalty calculated the same way as the TFSA one?
Yes. Both charge 1% of the highest excess in each month, but the FHSA uses Forms RC727, RC728 and RC729, and an FHSA excess can go back to an RRSP by designated transfer. The TFSA overcontribution page covers RC243, and the RRSP overcontribution page covers the T1-OVP.
What if my client opens the FHSA in December and overcontributes?
They pay for December only, if the excess is gone by January 1. In the CRA's example, Cole opens his FHSA in December 2025, transfers $5,000 and contributes $6,000 against $8,000 of room, and owes $30 on the $3,000 excess for December canada.ca.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.