TFSA Overcontribution: What Happens and How to Fix It

Key takeaways

• TFSA over-contributions are subject to a 1% per month penalty tax on the highest excess in that month
• The penalty accrues every month until the excess is removed — it does not stop at year-end
• The CRA can assess a waiver or cancellation of the penalty if it was caused by reasonable error
• Re-contributing a 2022 withdrawal in the same year (instead of waiting until January 1, 2023) is the most common over-contribution cause
• If you over-contributed, withdraw the excess immediately — each extra month costs 1% more

TFSA over-contributions are penalized automatically at 1% per month with no de minimis buffer. Unlike RRSPs, which allow $2,000 of over-contribution before penalties apply, TFSAs penalize the first dollar of excess contribution. The penalty is assessed by the CRA on Form RC243 (TFSA Return).

How the same-year re-contribution trap works

TFSA withdrawals restore contribution room, but only on January 1 of the following year. If you withdraw $20,000 from your TFSA in June 2022 and then contribute $20,000 back in October 2022, you have over-contributed by $20,000 for October, November, and December 2022. The penalty is 1% × $20,000 × 3 months = $600. The room is restored on January 1, 2023 — but the penalty for the prior months remains.

Requesting a penalty waiver

The CRA can waive or cancel the TFSA penalty if the over-contribution was reasonable — caused by a misunderstanding of the rules, a financial institution error, or an honest mistake. File a waiver request by letter to your tax services office, explaining why the over-contribution occurred and why you believe it was reasonable. The CRA reviews these on a case-by-case basis. First-time errors with a clear explanation have a better chance of waiver than repeated violations.

How to check your TFSA room

Use CRA My Account to view your current TFSA room. Note that the CRA's TFSA data may be several months behind, as financial institutions report contributions and withdrawals at year-end. If you made recent contributions or withdrawals, your My Account balance may not reflect them yet. Track your own TFSA transactions in a spreadsheet to ensure accuracy.