My sister was hit with a $1,000 tax penalty on her FHSA. Here’s how we fixed it

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Over the holiday break, I was helping my sister do some end-of-year tax planning when we saw something strange on her 2024 Notice of Assessment.

“An excess FHSA amount has been identified based on your contributions and participation room. A tax of 1 per cent per month is applicable.”

The penalty was nearly $1,000.

Before we get into what happened, here’s a brief refresher on the FHSA, Canada’s newest tax-advantaged savings vehicle.

The first home savings account, or FHSA, was introduced as part of the 2022 federal budget, with the first banks offering it to customers in the third quarter of 2023.

Money you contribute into the FHSA is deducted from your reported income (like an RRSP), earning you a tax refund. Money you withdraw for buying or building a home can be taken out tax-free, like a TFSA. The FHSA is what would happen if the RRSP and the TFSA had a love child.

RRSP or FHSA, when saving for a house, keep an eye on your timeframe, contribution limits

To qualify, the account holder must be a Canadian resident, between the age of 18 and 82, and be a first-time homeowner, which is defined as not living in a home owned by either you or your spouse for the preceding four years.

You can contribute up to $8,000 a year, up to a lifetime maximum of $40,000, per person. If you decide not to buy a house, the FHSA balance can also be transferred into your RRSP, so the FHSA can also be used to supercharge your retirement savings even if you don’t intend to buy a house.

My sister opened an FHSA in 2023 and put in $8,000. Then in 2024, she put in another $8,000. We checked over her bank statements and through the CRA portal. Everything looked correct.

Turns out the culprit was a missing form. Specifically, a form called “Schedule 15 - FHSA Contributions, Transfers and Activities.”

Never heard of it? You’re not alone. That’s because Schedule 15 is a new form that was created in 2023 alongside the FHSA. It’s what the CRA uses to keep track of your FHSA activity, and it’s supposed to be attached to your tax return every year that you make a contribution or withdrawal.

This form should have been filled out for you if you used tax preparation software or an accountant, but for some reason this didn’t happen. When we checked her 2023 tax return, Schedule 15 was not there.

Since this form was missing, the CRA didn’t know that her account was opened in 2023. Then when she filed her 2024 taxes, the CRA noticed that she had contributed $16,000 in total, but thought the account had been opened in 2024 rather than 2023. Therefore, they thought she had a total maximum contribution room of $8,000 rather than $16,000, and so believed she had overcontributed by $8,000.

The penalty for overcontributions is 1 per cent of the overcontributed amount every month, which resulted in a penalty of $8,000 x 1 per cent x 12 = $960.

To be fair, when a program is new, there’s bound to be growing pains. When the TFSA was created in 2009, many people accidentally overcontributed because they were unfamiliar with the rules.

Back then, the CRA forgave interest and penalties if the overcontribution was an honest mistake. And to their credit, the CRA was helpful in this case.

When we called the CRA and explained the situation, the CRA representative recognized the issue and told us they had seen it with other taxpayers.

To fix this, they told us, we needed to amend her tax returns from 2023 with a corrected Schedule 15 form.

What Canadian investment accounts would be called if they were honestly named

If you’re in a similar situation, the most straightforward way to do this is to use your certified tax software.

Log in and review your 2023 and 2024 tax returns, and check that your T4FHSA slips were entered correctly. Then check that a Schedule 15 has been filled out properly with the information in your T4FHSA slip and attached to your tax return.

If you find the form is still missing or has incorrect information, reach out to your tax software’s help desk. Once your return looks correct, use your tax software’s ReFILE feature to file an amended return.

You will need to wait a few weeks for the amended return to be reassessed, which will should include a refund. If this doesn’t fix the problem, you may need to reach out to the CRA support desk for further assistance.

As for my sister? I am happy to report that she got her money refunded.

Kristy Shen and Bryce Leung retired in their 30s and are authors of the bestselling book Quit Like a Millionaire.