The Clock Starts Immediately: TFSA Excess Contribution

A Tax-Free Savings Account is one of the most powerful savings tools available to Canadians – contributions grow tax-free, withdrawals are tax-free, and unused room carries forward indefinitely.

But contributing too much? That’s a different story entirely.

Take Morgan. They are 38 years old, a Canadian resident since 2009, and had never contributed to a TFSA before 2026. In January, they received a $100,000 cash inheritance and decided to contribute the full amount to a new TFSA. Morgan logs into CRA My Account and it shows $109,000 available TFSA room. They feel confident that the contribution is within the limit. To keep the momentum going, they also set up automatic monthly contributions of $1,500.

Morgan doesn’t think about their TFSA again until March 2027, when they begin to prepare for filing their 2026 T1 income tax and benefits return.

What just happened?

If you have contributed to your TFSA more than your contribution room allows, you have an over-contribution. Your available room is specific to you and is calculated as:

• The annual TFSA dollar limit for the current year ($7,000 in 2026), plus
• Any unused contribution room from prior years, plus
• Any withdrawals made the prior year (not the current year).

That last point is where many taxpayers get caught. When you withdraw from your TFSA, you regain that amount as new contribution room on January 1 of the following year – it’s not immediate. Unlike the RRSP, there is no $2,000 buffer for TFSA overcontributions. Even a $1 overcontribution triggers the 1% monthly tax.

For Morgan, the math at the start of 2026 looks like this:

The monthly $1,500 contributions begin in January alongside the lump sum. By the end of June, six months in, Morgan has contributed the remaining $9,000 – exhausting their room entirely. The July payment of $1,500 is the first excess contribution. Morgan doesn’t realize it yet, and the automatic contributions keep running.

December 31, Morgan made six excess monthly payments, totaling $9,000 in excess.

What does this actually cost?

The 1% monthly tax is applied to the highest excess TFSA amount in each month – not the amount contributed that month. The penalty is calculated on whatever the highest excess balance was in the calendar month.

For Morgan, the excess first appears in July and runs through December, where for each month Morgan doesn’t withdraw the excess, the penalty base grows:

Assuming the automatic monthly contributions continue, and the March 2027 contribution has already been processed before Morgan catches the issue, the additional 2027 exposure is:

• 2026 total excess balance = $9,000, less
• 2027 new annual limit addition = $7,500*
• Excess balance at January 1, 2027 = $1,500.

When Morgan checks their TFSA in March 2027, the excess amount is now $6,000.

* For illustration only, this example assumes a 2027 TFSA annual dollar limit of $7,500. The official 2027 limit should be confirmed against CRA guidance before publication.

If Morgan does not identify the issue until after the March 2027 automatic contribution has processed, the total excess TFSA tax has grown to $450.

The 1% monthly excess-contribution tax is not the only potential consequence. In more serious cases, CRA may also consider whether the TFSA “advantage” rules apply.

For TFSA purposes, an advantage can include income or capital gains that are reasonably attributable to a deliberate over-contribution. A deliberate over-contribution generally means a TFSA contribution that creates or increases an excess amount, where it is reasonable to conclude that the individual knew, or ought to have known, that the contribution could result in tax, penalty, or similar consequences under the Income Tax Act (207.01(1)).

If the advantage rules apply, the resulting tax can be significant. The advantage tax is intended to address abusive use of registered plans, including situations where a taxpayer knowingly over-contributes in an attempt to earn tax-free investment income despite the 1% monthly excess contribution tax (207.01(1)).

On Morgan’s facts, there is no indication that the over-contribution was deliberate. Morgan relied on their CRA My Account room and then failed to track the automatic contributions during the year. As a result, the 100% advantage tax should not apply on these facts, although the regular 1% monthly excess-contribution tax still does.

CRA My Account Note

The problem is that financial institutions generally only send TFSA transaction information for a given calendar year at the end of February, for the following year – meaning, the room displayed in My Account does not reflect contributions or withdrawals made during the current year.

CRA My Account is a starting point, not a real-time ledger. CRA information is updated once per year after issuers report prior-year transactions – financial institutions generally submit TFSA records by the end of February following the calendar year.

The safest approach is to maintain your own running total alongside your institution’s records, particularly when making large or automated contributions within the same year, tracking your own contributions and withdrawals.

How can this be fixed?

This requires two steps: withdraw the excess amount and report it.

Step 1: Withdraw the excess contribution

Contact the financial institution holding your TFSA to arrange the withdrawal. Unlike RRSP withdrawals, there is no withholding tax on TFSA withdrawals.

Morgan will withdraw the $6,000 excess in March 2027. This does not avoid the March 2027 tax, because the highest excess amount in March was $6,000, but it should stop the 1% monthly tax from continuing into April and later months, assuming no further excess contributions are made.

Note: For normal TFSA withdrawals, the withdrawn amount is added back as contribution room on January 1 of the following year. However, the “qualifying portion” of a withdrawal (the portion used to eliminate an excess amount) does not restore contribution room. Only the portion of a withdrawal that exceeds the excess amount (the non-qualifying portion) is added back as new room the following year.

Because the full $6,000 withdrawal is a qualifying withdrawal (used entirely to eliminate the excess), it does not restore as new contribution room on January 1, 2028. Morgan’s TFSA room increases only by the new 2028 annual dollar limit.

Step 2: File Form RC243 – TFSA Return

The RC243 calculates the penalty tax owing based on monthly excess balances. Schedule A is completed alongside it to map the month-by-month excess amounts. This is why the date of every contribution and withdrawal matters – tracking only annual totals are not sufficient.

The RC243 must be filed by June 30 of the calendar year following the year the tax applies – notably later than the T1 deadline and filed separately from it. If filed late, a penalty of 5% of the balance owing is applied, plus 1% for each full month the return is late (to a maximum of 12-months).

For Morgan, the 2026 RC243 is due June 30, 2027. As the excess continued into 2027, Morgan will also need to file a separate 2027 RC243 by June 30, 2028.

Is any portion recoverable?

As TFSA contributions are made with after-tax dollars and all growth inside the account is tax-free, there is no income deduction available when an excess is withdrawn.

For Morgan, the $6,000 withdrawal is simply returned. No T1 adjustments required at all – the only cost is the $315 penalty already accrued at December 31, 2026, plus the $135 penalty during 2027.

Can the penalty be waived?

CRA has discretion to waive or cancel all or part of the tax, if both conditions are met:

• The overcontribution arose due to a reasonable error, and
• The taxpayer withdrew the excess without delay.

The Income Tax Act subsection 207.06(1) details that the taxpayer must establish reasonable error and must have made distributions without delay of an amount at least equal to the excess amount plus income (including capital gains) reasonably attributable to that amount.

To request relief, there is no prescribed form – the request is a written submission supported by documentation of all contributions and withdrawals for the relevant years. CRA allows for both online submission and mailing options:

• CRA My Account – submit documents, or
• By mail to TFSA Processing Unit in either Sudbury, Ontario, or Winnipeg, Manitoba.

Note: A waiver applies to tax not yet assessed, and a cancellation applies to tax already charged.

Does Morgan qualify?

Probably not, however, it could depend on timing – as illustrated by a 2025 Federal Court decision.

In Naugle v. Canada (Attorney General) (2025 FC 926), the taxpayer sought cancellation of TFSA overcontribution tax for 2021 and 2022, maintaining she was unaware of the excess until speaking with CRA in spring 2023. CRA denied relief on the basis that she had received an assessment in July 2022, making her 2023 repayment untimely. The Federal Court granted judicial review, finding the decision unreasonable because CRA had not addressed inconsistencies in the record as to whether the notice had actually been sent.

If Morgan had identified the excess in August 2026 and withdrawn it immediately, that prompt action would have been the strongest fact in support of relief. Because Morgan only discovers the issue in March 2027, relief is more uncertain and would depend on the full record. The key questions would be when Morgan know or ought to have known about the excess, how quickly they corrected it once discovered, and whether the evidence supports that timeline.

The simplest fix? Track your own room

CRA My Account is a useful starting point, but does not provide a real-time balance. Before making any TFSA contributions, run your own calculation: cumulative room, less all contributions made to date this year, plus withdrawals from the prior year.

Related Reading:

This article focuses on Tax-Free Savings Account excess contributions. Although both accounts come with a 1% monthly penalty on overcontributions, the forms required are different, RRSP has a buffer of excess permitted, and the consequences of waiting too long to act can look very different. See our related post on RRSP excess contributions to understand what the process looks like on that side. To be posted next month.