Fixing an FHSA overcontribution the wrong way can cost you more than the overcontribution itself. Simply withdrawing the excess amount like any other withdrawal makes that money fully taxable, on top of whatever penalty already accrued. Filing the correct form instead, one specifically designed for this exact situation, lets that same excess come out without being added to your income at all. The difference between those two paths isn’t small, and most people never learn it exists until after they’ve already done it the expensive way.
What follows covers how the penalty itself accumulates, the actual correct process for fixing it, and why the specific method you choose to remove the excess genuinely changes what it ends up costing you.
How The Penalty Actually Builds Month Over Month
Once your total FHSA contributions and transfers in a year exceed your available participation room, the excess portion gets taxed at 1 percent for every month it remains unresolved, calculated against the highest excess amount that existed during that specific month. Take someone with $8,000 in available room who contributes $10,500 across the year, creating a $2,500 excess. That excess costs $25 a month in penalty tax, and left unaddressed for four months while the mistake goes unnoticed, it adds up to $100 in accumulated penalty before anything gets fixed.
This tax applies specifically to whatever excess existed during each individual month, meaning a partial correction partway through reduces what subsequent months get taxed on rather than resetting the whole calculation. The clock keeps running until the excess is genuinely eliminated, not just noticed, which is exactly why acting the moment you discover an overcontribution matters more than waiting until tax season to deal with it.
Fixing It Correctly Means Filing Form RC727
The proper way to remove an FHSA excess is a designated withdrawal or designated transfer, both handled through Form RC727, given directly to your financial institution rather than mailed to the CRA. A designated withdrawal or a designated transfer specifically avoids being counted as income, unlike an ordinary withdrawal of the same excess amount, which gets added to your taxable income for the year and hit with withholding tax on top of it.
Which of the two options is actually available to you depends entirely on how the excess originally arose. If your overcontribution came purely from cash contributions, you can only remove it through a designated withdrawal, since a designated transfer back to an RRSP is specifically limited to excess amounts that came from an RRSP-to-FHSA transfer in the first place. Someone whose entire excess resulted from contributing too much cash genuinely cannot use the transfer option to fix it, regardless of whether transferring back to an RRSP might otherwise seem like the cleaner solution.
Reporting The Excess Separately From Fixing It
Filing Form RC727 to actually remove the excess is a completely separate step from reporting it to the CRA and paying whatever tax has already accrued. That reporting happens through Form RC728, the FHSA Return, along with Schedule A specifically for excess amounts, both due by June 30 of the year following the year the tax arose. Someone who had an excess amount at any point during 2026 needs this return filed and any tax owing paid by June 30, 2027, regardless of how quickly the underlying excess itself was actually corrected.
Missing that June 30 deadline triggers its own separate late-filing penalty and interest charges, layered directly on top of whatever monthly excess tax was already owed, meaning a genuinely resolved overcontribution can still generate an entirely avoidable additional cost if the paperwork itself gets filed late. Most FHSA holders never need to file an RC728 at all, since it’s specifically triggered by having FHSA tax payable, but anyone who’s had even a brief excess amount during the year needs to treat this filing as a genuine, separate obligation from simply fixing the account balance itself.
What Actually Causes Most FHSA Overcontributions
The most common trigger isn’t a single large mistaken deposit, it’s multiple FHSA accounts at different institutions where the combined total across all of them exceeds the shared room, since your annual and lifetime limits apply across every FHSA you hold rather than resetting separately for each one. An RRSP-to-FHSA transfer stacked on top of cash contributions in the same year is another frequent cause, since both draw from the identical pool of available room and it’s genuinely easy to track one without accounting for the other.
Confirming your actual combined contributions and transfers across every FHSA you hold, rather than assuming each account tracks its own separate limit, is worth doing directly before assuming a specific deposit fits comfortably within your remaining room.
Correcting Your Own Overcontribution The Right Way
Confirm exactly how your excess arose, purely from cash contributions or genuinely including an RRSP transfer, before assuming a designated transfer is available to you, since that specific origin determines which correction method Form RC727 actually allows. File both Form RC727 with your financial institution and Form RC728 with the CRA promptly once you discover an excess, rather than assuming resolving the account balance alone satisfies your full reporting obligation.
And if you’re managing contributions across multiple registered accounts and want to avoid this kind of overlap entirely, our breakdown of FHSA contribution room and carry forward rules covers exactly how your available room gets calculated each year, worth reviewing directly before your next contribution rather than after a mistake has already happened.
What People Get Wrong About FHSA Overcontributions Most Often
Does the monthly penalty stop the moment I realize I’ve overcontributed? No, the penalty continues accruing until the excess is genuinely eliminated through a designated withdrawal, designated transfer, or ordinary taxable withdrawal, not simply from the moment you become aware of the mistake.
If I can’t do a designated transfer because my excess came from contributions, does that mean I’m stuck paying tax on the withdrawal? No, a designated withdrawal specifically avoids being included in your income, the exact same tax-free treatment as a designated transfer, it’s simply the option available when the excess originated from contributions rather than an RRSP transfer.
Do I still need to file Form RC728 if I already fixed the excess before the year ended? Generally yes, if FHSA tax was actually payable at any point during the year, the RC728 return and Schedule A are still required to report and settle that tax, even though the underlying excess itself has already been resolved.
