What Happens If You Withdraw From an FHSA Not for a Home (or by Mistake)?

Taking money out of a First Home Savings Account for anything other than a qualifying home purchase makes it a taxable withdrawal: the full amount is added to your income for the year. That is the part that can’t be undone. The contribution room, however, comes back the following year as re-participation room, which is the part many explanations get wrong. This page covers both, whether the withdrawal was a deliberate choice or a mistake. For how the account works overall, see the FHSA guide or the FHSA guides directory.

What makes a withdrawal taxable

An FHSA withdrawal that isn't a qualifying withdrawal, a designated amount or an amount otherwise included in your income is a taxable withdrawal: it is included in your income for the year you receive it, tax is withheld at source and credited against what you owe, and the part that didn't reduce an excess FHSA amount comes back as re-participation room the following year. A designated amount is one used to fix an over-contribution, and a direct transfer to another FHSA, an RRSP or a RRIF isn’t taxed either. A tax-free FHSA withdrawal needs you to be a first-time buyer at the time, have a written agreement to buy or build a home in Canada by October 1 of the next year (and not have bought it more than 30 days before the withdrawal), stay a Canadian resident until you buy it, intend to live in it within a year, and give your FHSA issuer Form RC725. The full list is on FHSA withdrawal rules.

Common ways a withdrawal ends up taxable:

• taking money out before a purchase agreement is signed;
• withdrawing more than 30 days after acquiring the home;
• no longer meeting the first-time buyer test on the day of the withdrawal (the first-time buyer rules explain the test);
• withdrawing by mistake, for example from the wrong registered account;
• cashing out when the plan to buy is dropped, instead of transferring.

If you think a withdrawal tied to a purchase might have qualified after all, check it against those conditions before treating it as taxable.

The tax on a taxable withdrawal

Your issuer withholds tax before paying out the money. The federal rates are the lump-sum rates that also apply to RRSP withdrawals; in Quebec, a lower federal rate applies and Revenu Québec’s own single-payment rate is withheld on top:

Withholding is a prepayment, not the final tax. The whole withdrawal goes on line 12905 of your return and is taxed at your marginal rate; the amount withheld is credited against what you owe.

Example. You withdraw $10,000 and your marginal rate is 30%. The issuer withholds 20%, or $2,000, and pays you the rest. At filing, the tax on the $10,000 is $3,000, so about $1,000 more is due with your return. If a balance is still unpaid after the balance-due date, CRA charges prescribed interest on it.

If you deducted the contribution, the deduction saved tax at your marginal rate in that year. If your rate is the same when you withdraw, the tax roughly cancels the earlier deduction, much as it would with an RRSP. The lasting cost is the tax-free growth the money gave up, the difference in rates if your rate is higher now, and part of your deduction limit: a contribution you deducted and then withdrew still counts toward the $40,000 lifetime cap on FHSA deductions, so putting the money back later may not give you a second deduction.

The room comes back: re-participation room

Under CRA’s participation-room rules, the portion of a taxable withdrawal that did not reduce or eliminate an excess FHSA amount becomes FHSA re-participation room. It is added to your participation room the year after the year of the taxable withdrawal.

• It is added on top of that year’s $8,000 of annual room, not counted inside it.
• CRA’s formula adds the re-participation room you have used back into the lifetime calculation, so re-contributing the amount does not use up the $40,000 lifetime limit on participation room a second time.
• The deduction is a different matter. Lifetime FHSA deductions can't exceed $40,000, and transfers from your RRSPs reduce that amount. That cap counts every deduction you have claimed, including for contributions you later withdrew, so a re-contribution beyond it can’t be deducted.
• A withdrawal made to remove an over-contribution creates no re-participation room, since it only takes out room you were never entitled to.
• The room only helps while the account is open. Once your maximum participation period ends, there is nothing to re-contribute into.

Worked example. You have contributed $16,000 and withdraw $8,000 of it as a taxable withdrawal. That $8,000 is income this year. Next year your participation room is the normal $8,000 plus $8,000 of re-participation room, or $16,000 in total (plus any carried-forward room).

A qualifying withdrawal is different: it creates no re-participation room, and the account’s maximum participation period ends at the close of the following year anyway.

What you cannot undo

• The income inclusion: the withdrawal stays in your income for the year it was paid out.
• Putting the money back the same year to cancel it: the room only returns the following year.
• Reclassifying it as a qualifying withdrawal after the fact, if the conditions weren’t met when it was made.
• Moving the cash into an RRSP to avoid the tax: that is a new RRSP contribution, which uses RRSP room, and the FHSA withdrawal remains taxable.

If a withdrawal was made in error, contact your issuer right away; the CRA rules for FHSA withdrawals contain no way to cancel one.

What to do next

If you still plan to buy, keep the account open. The remaining balance continues to grow tax-free, the re-participation room lets you rebuild it, and you can still make a qualifying withdrawal later. The FHSA and the Home Buyers’ Plan can both go toward the same purchase.

If you have decided not to buy: You can move FHSA savings into your own RRSP or RRIF with no immediate tax through a direct transfer between the institutions, up to the end of your maximum participation period; it doesn't use your RRSP deduction room or change your FHSA room, and the money is taxed only when it later comes out of the RRSP or RRIF. Withdrawing the cash and contributing it yourself is a taxable FHSA withdrawal plus a new RRSP contribution that uses RRSP room, and if you have an excess FHSA amount only your FHSA balance minus the excess moves tax-free. The options and the deadline are on what happens to your FHSA if you never buy.

If you need the cash, a withdrawal in a lower-income year is taxed at a lower marginal rate. Weigh that against the growth the money gives up.

Reporting it at tax time

Your issuer reports a taxable withdrawal on your T4FHSA slip, along with the tax withheld. The amount goes on line 12905 and on Schedule 15 - FHSA Contributions, Transfers and Activities. The slip’s boxes are explained in the T4FHSA slip explained. If you filed before the slip arrived, you can change your return to add the income.

Related guides

• FHSA contribution limit, including over-contributions
• FHSA vs TFSA vs RRSP
• RRSP withdrawal rules