TFSA over-contribution: the 1% tax, the withdrawal trap and the fix

What happens if you over-contribute to your TFSA: a 1% tax every month

A TFSA over-contribution is taxed at 1% a month on the highest excess amount in each month, for every month the excess stays in your accounts. According to the Canada Revenue Agency (CRA), you should withdraw the excess as soon as possible and not wait to be told, then report it on Form RC243, the TFSA Return, by 30 June of the following year.

The rule comes from section 207.02 of the Income Tax Act: if at any time in a calendar month you have an excess TFSA amount, you pay "1% of the highest such amount in that month". There is no grace amount. The CRA says any over-contribution, "even in error, is taxable".

The CRA lists three common ways people over-contribute:

• miscalculating available room and contributing too much;
• re-contributing a withdrawal in the same year without enough room;
• contributing to more than one TFSA without tracking the total.

Check your room from your own records before your next deposit with the TFSA contribution room calculator, which adds up the yearly limits from the year you turned 18 and flags any excess.

How the TFSA over-contribution penalty is calculated

The TFSA over-contribution tax is 1% of the highest excess in each calendar month, and a part month counts as a full month. Taking the money out on the last day of a month does not save that month's tax, and taking out only part of the excess does not reduce the tax for the month it was at its highest.

The CRA gives two examples, set out below with the monthly figures:

Two further rules can raise the bill. According to the CRA, excess amounts from a deliberate over-contribution may be taxed at the 100% advantage rate. And if you are over your room while you are also a non-resident of Canada, the CRA can charge two separate 1% monthly taxes.

The 2026 TFSA limit is $7,000, and total room since 2009 is $109,000

The TFSA dollar limit for 2026 is $7,000, added to your room on 1 January 2026, according to the CRA. Someone who was 18 or older and resident in Canada in 2009 and has never contributed has $109,000 of room in 2026, the total of every annual limit from 2009 to 2026.

The CRA says the limit is indexed to inflation and rounded to the nearest $500. Room is personal: it is the total you can put into all your TFSAs together, and it starts in the year you turn 18 or, for a new resident aged 18 or over, the year you become resident. Investment growth does not use up room, and losses do not give it back.

The CRA works out your room each year as the current dollar limit, plus unused room from earlier years, plus withdrawals made the previous year, minus contributions already made this year. It warns that the room shown in your CRA account is updated only once a year, in spring, after issuers report by the end of February. Use your own records for anything you did this year.

The classic trap: withdrawals only come back on 1 January of the next year

A TFSA withdrawal is added back to your contribution room on 1 January of the next calendar year, not when you take the money out. Putting the money back in the same year, when you have no other room, creates an over-contribution. According to the CRA, this re-contribution mistake is one of the main causes of excess amounts.

Worked example with dates. Priya turned 18 in 2009 and has contributed the full limit every year, $102,000 to the end of 2025, so she starts 2026 with $7,000 of room. These figures come from the site's TFSA engine with a birth year of 1991.

The excess was in her TFSA for part of June, July, August and September, so she owes 4 × 1% × $5,000 = $200. She files Form RC243 with Schedule A and pays by 30 June 2027.

If Priya had left the $5,000 in until the new year, she would owe 7 months, June to December, or $350. Under the Income Tax Act formula for the excess, the 2027 dollar limit and her 2026 withdrawals count against the leftover excess on 1 January 2027, which is when the monthly tax would stop.

Her room on 1 January 2027 is the 2027 dollar limit plus $5,000: her two 2026 withdrawals of $10,000 are added back, less the $5,000 by which her 2026 contributions ran past her room. The same maths applies if you over-contribute in December: one month of tax, then the new limit absorbs the excess on 1 January, though you still file the TFSA Return.

How to fix a TFSA over-contribution in 4 steps

To fix a TFSA over-contribution, withdraw the full excess, file Form RC243 with Schedule A, pay the tax, and ask for a waiver if the mistake was reasonable. The CRA says you do not need to phone it after you withdraw, because your financial institution reports the withdrawal.

1. Withdraw the whole excess now. Partial withdrawals do not cut the tax for the month the excess peaked. Withdraw from any of your TFSAs; the room is shared.
2. Complete Form RC243, TFSA Return, and Schedule A, Excess TFSA Amounts (RC243-SCH-A). List the excess month by month.
3. File and pay by 30 June of the following year. For an excess in 2026, the deadline is 30 June 2027. Send the forms through "Submit documents" in your CRA account, or by post to the TFSA Processing Unit at the Sudbury or Winnipeg Tax Centre. To pay, the CRA's payment options ask for the payment type "Other benefit, tax, fee or amount owing", then "TFSA".
4. Ask for a waiver in a separate letter if the excess was an honest error (next section).

If you do nothing, the CRA says you may receive a TFSA notice of assessment later in the summer, which the CRA says can include penalties and interest.

The CRA excess amount letter: educational letter or notice of assessment

The CRA sends either an educational letter or a TFSA notice of assessment (NOA) to people who have over-contributed, usually in late spring of the year after the excess arose. It sends them only once all issuers have reported, and issuers have until the last day of February to do so, so an excess can sit in your account for months before you hear anything.

The educational letter does not replace the TFSA Return. According to the CRA, you are required to file Form RC243 for an excess whether or not you receive a notification.

How to ask the CRA to waive the TFSA over-contribution tax

You ask the CRA to waive or cancel TFSA tax by sending a letter, not a form, to the TFSA Processing Unit. The letter should explain why the excess happened and why it would be fair to waive or cancel the tax. You can send it through "Submit documents" in your CRA account or by post to the Sudbury or Winnipeg Tax Centre.

According to the CRA, it can waive or cancel all or part of the tax if it decides that is fair, looking at:

• whether the tax arose because of a reasonable error;
• whether the same transactions also led to another tax under the Income Tax Act;
• how far withdrawals have already been made to correct the error.

Form RC4288 is the CRA's general Taxpayer Relief Request to cancel or waive penalties and interest. The CRA's TFSA pages direct TFSA tax waivers to a letter to the TFSA Processing Unit instead, and say this waiver is limited to tax under Part XI.01 of the Income Tax Act, the part of the Act that covers TFSA taxes.

A useful letter gives the dates and amounts, the reason (for example, a same-year re-contribution after a withdrawal you believed restored your room), the date you withdrew the excess, and copies of your TFSA statements. Withdrawing before you write helps, because the CRA weighs how far you have already corrected the error.

If the CRA refuses, you can ask for a second review. After that, the CRA says you can apply to the Federal Court for judicial review within 30 days of the decision letter. To challenge the calculation itself, file Form T400A, Notice of Objection, within 90 days of the NOA; the CRA recommends asking for a waiver first.

Transfers between institutions: a direct transfer is safe; withdraw-and-recontribute is not

A direct transfer between TFSAs, arranged by the receiving financial institution, does not affect your contribution room. Withdrawing the money yourself and depositing it into a TFSA at another institution counts as a new contribution, and can create a large excess.

The CRA gives the example of a holder with no room left who withdraws $50,000 in April to move it to a TFSA at another bank for a better rate. The deposit is a $50,000 over-contribution, taxed at $500 a month until removed. The $50,000 withdrawal only comes back as room on 1 January the next year.

Moving RRSP money into a TFSA is taxed as an RRSP withdrawal at its fair market value, according to the CRA. RRSP withdrawal tax explains the withholding, and the RRSP tax refund calculator shows what a contribution saves you if the RRSP is the better home for the money.

Non-residents: a second 1% tax on any contribution

A TFSA contribution made while you are a non-resident of Canada is taxed at 1% a month until you withdraw all of it or become resident again, whichever comes first. According to the CRA, taking out only part of a non-resident contribution does not reduce the tax.

This tax is separate from the over-contribution tax. If a non-resident contribution also exceeds your room, the CRA can charge both 1% taxes, 2% a month in total. Non-resident contributions are reported on Schedule B (RC243-SCH-B) with the same 30 June deadline.

As a non-resident you may keep your TFSA and withdraw from it tax-free, and withdrawals are still added back as room on 1 January of the next year. You cannot use that room until you are resident again. Under section 207.01 of the Income Tax Act, the dollar limit only adds room for a year in which you are 18 or older and resident in Canada at some point; the TFSA room calculator lets you exclude non-resident years.

How to avoid another TFSA over-contribution

The simplest protection is to work out your room from your own statements before every deposit, and never to re-deposit a withdrawal in the same year unless you have room left. The CRA's RC343 worksheet and the calculator in your CRA account both do this sum.

1. Before a deposit, add this year's contributions across all your TFSAs and subtract them from your room at 1 January.
2. Do not rely on the CRA account figure for this year's activity; it is updated once a year.
3. Move a TFSA only by direct transfer, requested at the new institution.
4. Keep a note of each withdrawal and the date it returns as room: 1 January of the next year.

TFSA withdrawals are not taxable income, so they do not change your income tax; for what does, see the Canada income tax pages. Your next step: run your figures through the TFSA contribution room calculator and, if it shows an excess, withdraw it this month.