TFSA Over-Contribution Penalty: The 1% Rule and How to Fix a CRA Notice
Every summer the CRA quietly mails out thousands of TFSA over-contribution notices, and almost every recipient is caught by surprise. The 1%-per-month penalty compounds fast, but the fix is well defined - if you act quickly. Here is how the penalty works, how to unwind it, and how to ask the CRA to waive it in 2026.
What triggers the TFSA over-contribution penalty?
A TFSA over-contribution happens the moment your total lifetime contributions cross your available room. The CRA then charges a penalty of 1% per month on the highest excess amount that sat in the account at any point during the month, and it keeps charging until the excess is either withdrawn or absorbed by new room the following January.
The tax lives outside the account. It does not come out of your TFSA balance - the CRA bills you personally on a Notice of Assessment. That is why so many people get blindsided months after the mistake: the account balance never flags the problem.
How much TFSA room do you actually have in 2026?
Your 2026 annual contribution limit is $7,500, up from $7,000 in 2025. But the number that matters is your cumulative room, which stacks every annual limit since you turned 18 or since 2009, whichever is later, plus every dollar you have withdrawn in prior years.
| Year | Annual limit | Cumulative if 18+ since 2009 |
|---|---|---|
| 2009-2012 | $5,000 | $20,000 |
| 2013-2014 | $5,500 | $31,000 |
| 2015 | $10,000 | $41,000 |
| 2016-2018 | $5,500 | $57,500 |
| 2019-2022 | $6,000 | $81,500 |
| 2023 | $6,500 | $88,000 |
| 2024 | $7,000 | $95,000 |
| 2025 | $7,000 | $102,000 |
| 2026 | $7,500 | $109,500 |
The safest way to check your personal number is to log into CRA My Account. Look at the TFSA section under "Contribution Room". Warning: the CRA number is usually stale by weeks or months because it only updates after your bank files the T3-TFSA slip in February. If you contributed heavily this year, the CRA figure may still show room you have already used.
The five most common ways people over-contribute by accident
- Re-contributing a withdrawal in the same year. Withdrawals only restore room on January 1 of the following year. Pull $5,000 out in June to fund a vacation and put it back in September, and you have over-contributed by $5,000 for four months if you were already at your limit.
- Multiple TFSAs at different institutions. Every TFSA counts against the same lifetime limit. Maxing your Wealthsimple TFSA and then opening a second TFSA at Questrade and contributing there too is one of the CRA's favourite catches.
- Trusting the CRA My Account number in Q1. The room figure is only refreshed after every issuer files their annual slip. Early in the year it typically still reflects last year's activity.
- Moving a TFSA between banks the wrong way. A direct transfer (bank to bank on form RC240) does not touch your room. But withdrawing from Bank A and depositing at Bank B counts as a fresh contribution, and the original withdrawal room only comes back next January.
- Employer stock plans. Some employer share purchase or DPSP plans deposit units into a TFSA on your behalf. Employer contributions still count against your personal limit.
How the penalty is actually calculated
The penalty is 1% per month of the highest excess balance during each month, from the first month you were over until the last month you were still over. Even a single day inside a month counts as a full month for that month's penalty.
Example - accidental $3,000 over
- March 3: contribute $3,000 that puts you over the limit
- May 20: notice the mistake, withdraw $3,000
- Months in excess: March, April, May (3 months)
- Penalty: 1% × $3,000 × 3 = $90
Example - $8,000 over, ignored
- February 10: over-contribute $8,000
- You get a CRA warning letter in July but do nothing
- You do not withdraw until December 15
- Months in excess: Feb through Dec = 11 months
- Penalty: 1% × $8,000 × 11 = $880
What to do the moment you realise you have over-contributed
Fix it in five steps
- Stop contributing immediately. Cancel any auto-deposit or pre-authorised contribution to every TFSA you hold.
- Withdraw the excess amount this calendar month. The penalty is per-month, so a same-month withdrawal saves you one full month of tax.
- Confirm the withdrawal is coded as such. A "transfer to non-registered" from Wealthsimple or Questrade will show up correctly on your T4A/T3-TFSA in February.
- File Form RC243 (TFSA Return) and RC243-Sch-A by June 30 of the following year. This is how you self-report the penalty to the CRA. Late filing adds interest and a separate penalty.
- Pay the calculated penalty. Include a cheque or make an online payment through your bank. Interest starts accruing 30 days after the deadline.
Requesting a waiver: does it actually work?
The Minister of National Revenue has statutory authority under subsection 207.06(1) of the Income Tax Act to waive or cancel the penalty when the over-contribution was made because of a reasonable error and the excess was withdrawn without delay. This is not a rubber-stamp process, but a well-prepared request has a genuine chance.
To ask for a waiver, write a letter to the Sudbury Tax Centre explaining what happened, attach proof of the withdrawal, and mail it in with your RC243. The letter should cover four points: what caused the error, that you corrected it as soon as you noticed, that you have paid the tax as calculated, and that you have taken steps to prevent it happening again.
- Reasonable error scenarios that often succeed: relying on a CRA My Account figure that turned out to be wrong, a spouse or advisor contributing on your behalf, employer plan errors, a re-contribution that a bank agent verbally confirmed was allowed.
- Scenarios that rarely succeed: "I did not know the rules", ongoing over-contributions after receiving a CRA warning letter, deliberate over-contributions to test the penalty against expected returns.
How to stay out of the trap next time
The single best defence is to track every contribution and every withdrawal yourself, in one place, rather than trusting the CRA figure or a per-bank statement. Wealth Rebalancer imports CSVs from every major Canadian broker and shows you all account balances and cost basis together, so a re-contribution in the wrong year jumps out immediately.
- Keep a simple running total of TFSA contributions across every institution for the current calendar year.
- Log any withdrawal along with the date - room only comes back next January.
- When switching brokers, always use a direct transfer (form RC240 or your new broker's transfer request), never a withdrawal followed by a new contribution.
- Wait until late March each year before trusting CRA My Account for your available room. Issuers have until end of February to file.
- If a spouse manages family finances, coordinate so you never both contribute to the same TFSA (only the account holder's room applies - a spousal contribution still counts against the account holder's limit).
The CRA warning letter: what it means and how to respond
The CRA typically sends one of two letters. The first is an educational letter notifying you that you appear to have over-contributed and asking you to confirm the situation. The second is a formal Notice of Assessment with the penalty already calculated and billed. The educational letter is your best-case scenario: respond quickly, withdraw if you have not, and you may avoid the assessment entirely.
Do not ignore either one. Silence is treated as agreement with the CRA's figures, and appealing an assessment after the deadline is much harder than responding to the initial letter.
Frequently asked questions
How do I know if I have over-contributed to my TFSA?
Add every contribution you made this year across every TFSA you hold (at every institution) and compare to your available room from the start of the year. If the total exceeds available room, you are over. Do not rely on the CRA My Account figure early in the year - it only updates in late February or March after issuers file their annual slips.
Does withdrawing the excess immediately cancel the penalty?
It stops the clock going forward, but the CRA still charges 1% for every month or partial month the excess was in the account. A same-day fix means you owe one month of penalty on the highest excess balance in that month. Waiting six months multiplies that by six.
Can the CRA waive the TFSA over-contribution tax?
Yes, under subsection 207.06(1) the Minister can waive the tax if the over-contribution was made due to a reasonable error and the excess was withdrawn without delay. You still need to file the RC243, pay the tax as assessed, and separately request the waiver in writing. Success is not guaranteed but well-documented reasonable-error cases are frequently granted.
What happens if I move a TFSA between banks?
A direct transfer between institutions using form RC240 (or the receiving broker's transfer request) does not affect your contribution room. But if you withdraw the balance yourself and then deposit at the new bank, the deposit counts as a new contribution and the withdrawn amount only restores room the following January. Always use a direct transfer.
Do investment gains inside the TFSA count as over-contributions?
No. Growth inside a properly funded TFSA is not a contribution and does not affect your room. But growth on the excess portion is treated differently - Section 207.05 imposes a 100% advantage tax on income earned on excess contributions, which is why paying the 1% and letting it ride is almost never worth it.
When is the deadline to file the RC243?
June 30 of the year following the over-contribution. Miss the deadline and the CRA can assess a separate late-filing penalty on top of the 1% monthly tax, plus interest at the prescribed rate on any unpaid balance. If the deadline is approaching and you are still gathering documents, file with best-estimate figures rather than skip the filing.