If you’ve opened a First Home Savings Account (FHSA), be aware that the carryforward rules differ from those of other registered accounts.
When the FHSA is opened, the account holder is able to contribute $8,000 in annual participation room. Any unused amounts can be carried forward to the following year, but only to a maximum of $8,000 and subject to a lifetime limit of $40,000. This differs from the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) where unused contribution room is carried forward indefinitely (or until age 71 for the RRSP) — there is no limit.
For example, consider an individual who opened the FHSA in 2023 and contributed $4,000. In 2024, the FHSA would have $12,000 in participation room — $8,000 of new room for 2024 and $4,000 carried forward from 2023. However, if the individual doesn’t contribute in 2024, they would have $16,000 — not $20,000 — of participation room in 2025, as only $8,000 carries forward from 2024.
Why Is This Important?
Similar to other registered accounts, the CRA applies a penalty of one percent per month on excess FHSA contributions. In the example above, a $4,000 over-contribution would result in a penalty of $40 per month or $480 per year, which is not insignificant. Additionally, since the FHSA generally closes at the end of the year of its 15th anniversary, or the year after the first qualifying withdrawal, if you don’t contribute the full $8,000 each year, you may run out of time to contribute the lifetime maximum of $40,000 and miss out on the full tax-deductible opportunity. By not maximizing contributions from the outset, you might also forgo the opportunity for tax-free growth — contributing $8,000 in each of the first five years from the plan’s inception allows for the greatest potential tax-free growth when it comes to timing.
Here are additional tips to consider before year end for other registered accounts:
RESP — While there is no annual contribution limit (the lifetime limit is $50,000 per beneficiary), there are carryforward limits for the Canada Education Savings Grants (CESGs), which offer a 20 percent matching grant on contributions of up to $2,500 each year for a grant maximum of $500. If there is unused grant room from a previous year, this can be carried forward to a maximum grant of $1,000 per year. So if you haven’t made contributions in a prior year, the CESG limit can be achieved with an annual RESP contribution of $5,000.
TFSA — Remember that contribution room resets itself at the start of every calendar year. So, if you need to access funds from your TFSA, consider withdrawing before year end. If you wait and withdraw funds after January 1, 2025, this amount will only be added back to your available contribution room on January 1, 2026.
RRSP — Don’t forget that both unused RRSP contribution room and unused RRSP deductions can be carried forward. While making RRSP contributions as early as possible allows for tax-deferred growth, deferring the deduction may provide tax-planning opportunities. For instance, if you make a contribution, you can choose to delay the RRSP deduction to a future year, perhaps one in which you will have a relatively higher income, to offset the higher potential tax.
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