TFSA overcontribution penalty: 1% a month on the highest excess

How is the 1% calculated?

Section 207.02 charges 1% of the highest excess TFSA amount at any time in a calendar month, for each month an excess exists laws-lois.justice.gc.ca. The CRA applies it to the highest excess in the account for each month it remains canada.ca. Three rules follow from that wording.

The CRA's own examples show it. A $2,000 overcontribution made in June and withdrawn later in June costs $20. Left in until September, it costs $80 ($20 for each of June, July, August and September) canada.ca. If you need the RRSP comparison, the cushion and its T1-OVP return are on the RRSP limit page.

A $5,000 excess in 2026 costs $50 to $500, depending on when it comes out

Your client used all of their 2026 room in January. On March 10, 2026 they deposit another $5,000, relying on the room shown in their CRA account. They withdraw $3,000 on May 20 and the last $2,000 on July 6.

Timing drives the bill. Here is the same $5,000 excess with different exit dates.

The CRA confirms the partial withdrawal math: in its example, a $6,000 excess with $4,000 withdrawn in mid September still costs $60 for September, because the tax follows the highest excess in the month canada.ca.

Does the excess fix itself on January 1?

Mostly, but the year's tax is already owed. Under the 207.01(1) formula, unused room at the end of a year is last year's room plus prior year withdrawals plus the new dollar limit, minus this year's contributions, so an overcontribution carries forward as negative room. The excess TFSA amount for the new year then subtracts that new year's dollar limit laws-lois.justice.gc.ca.

In the example, if the $5,000 stayed in, the client ends 2026 with negative $5,000 of room. The 2027 dollar limit is not published as of October 2026, but any 2027 limit of $5,000 or more absorbs the excess on January 1, 2027, and the client's 2027 room drops by the same $5,000. They still owe $500 for March to December 2026.

Waiting also costs the waiver. Section 207.06 requires the excess to be withdrawn without delay before the CRA can waive the tax laws-lois.justice.gc.ca, and the CRA's advice is to withdraw the full excess as soon as possible canada.ca.

How do you file and pay?

Your client files the TFSA Return, Form RC243 canada.ca, with Schedule A, Excess TFSA Amounts, which works out the total excess subject to the 1% tax canada.ca. The return and the payment are due by June 30 of the year after the tax year, so tax on a 2026 excess is due June 30, 2027 canada.ca. The statute says before July of the following year laws-lois.justice.gc.ca.

The CRA usually tells holders about an excess through their CRA account or by mail in late spring canada.ca. Don't wait for the letter: the obligation to file exists whether or not one arrives canada.ca. Submit through "Submit documents" in the CRA account or by mail to the TFSA Processing Unit at the Sudbury or Winnipeg Tax Centre, and pay with the payment type set to TFSA canada.ca.

Can the CRA waive the TFSA penalty?

Yes, if two conditions are met. Your client must show the excess arose from a reasonable error, and withdrawals must be made without delay that total at least the excess plus any income, including capital gains, reasonably attributable to it laws-lois.justice.gc.ca.

The CRA also weighs whether the same transactions triggered other taxes under the Income Tax Act and how much was withdrawn to correct the error. A waiver covers amounts not yet assessed, a cancellation covers amounts already assessed. Send a letter explaining how the excess happened and why relief is fair, through "Submit documents" or by mail to the TFSA Processing Unit; if the answer is no, you can ask for a second review canada.ca.

A waiver request is not an objection. If the CRA got the numbers wrong, file a notice of objection on Form T400A within 90 days of the date on the TFSA notice of assessment canada.ca. The general timing rules are on the objection deadline page.

What causes most TFSA overcontributions?

Putting a withdrawal back in the same year. A withdrawal only comes back as room on January 1 of the next calendar year. The CRA's example: a holder who contributed the full $7,000 for 2025, withdrew $3,000 and put it back created a $3,000 overcontribution canada.ca.

Trusting the room in the CRA account. The CRA updates it once a year, in the spring, with the prior year's transactions, so it can overstate room for anyone who contributed or withdrew this year canada.ca. Rebuild it from issuer statements: the annual limit for this year, plus unused room from earlier years, plus last year's withdrawals, minus this year's contributions canada.ca. The dollar limit is $7,000 for 2024 to 2026, and the annual limits from 2009 through 2026 add up to $109,000 for someone eligible every year canada.ca.

Moving money between institutions by hand. A direct transfer requested through the receiving institution doesn't touch room. Withdrawing the cash and depositing it at the new institution counts as a withdrawal plus a new contribution canada.ca. The TFSA limit page covers room in more detail.

Contributing as a nonresident. That triggers a separate 1% monthly tax on top of the excess tax, so a nonresident who also exceeds their room pays two 1% taxes canada.ca. The departure tax page covers what else changes when a client leaves.