TFSA over-contribution: how it happens and how to fix it

Someone I know withdrew $8,000 from their TFSA in March to cover a home renovation. A few months later, they had the money again and put it back in. Made sense to them. It was their account, their money, and they were just returning what they took out.

Then a letter arrived from the CRA. They’d over-contributed by $8,000 and owed a penalty for every month the excess stayed in the account.

They were completely confused. How could putting your own money back into your own account be a problem? The answer is one of the most common traps in Canadian investing, and almost nobody explains it clearly until it’s too late.

None of this is financial advice. TFSA rules are specific and the penalties are real. If you think you’ve over-contributed, it’s worth getting proper guidance. But understanding how this happens can help you avoid it entirely.

The withdraw-and-recontribute trap

Here’s the rule that catches people. When you withdraw money from your TFSA, the contribution room doesn’t come back until January 1st of the following year.

If you contributed your full room for the year, withdrew $10,000 in June, and recontributed $10,000 in September, you’re now $10,000 over your limit. Even though it’s the same money. Even though it was in the account before. The CRA doesn’t care about the logic. The rule is mechanical: withdrawals restore room on January 1st of the next year, not the day you withdraw.

This is, by far, the most common way people accidentally over-contribute. It feels counterintuitive because the money was “already in there.” But TFSA contribution room doesn’t work like a chequing account balance. It follows a strict calendar.

Other ways it happens

The withdraw-and-recontribute scenario gets the most attention, but there are other ways people end up over their limit.

Having TFSAs at multiple institutions is one. You might have a TFSA at your bank and another at an online brokerage. If you lose track of how much you’ve contributed to each, the combined total can exceed your room without either institution flagging it. Each institution only knows about its own account.

Miscounting your room is another. People sometimes forget about contributions they made years ago, or they calculate their total room incorrectly. If you turned 18 before 2009 and have never contributed, your total room in 2026 is over $100,000. But if you’ve been contributing off and on for years, the math gets harder to track.

Transferring between TFSAs can also cause trouble if done incorrectly. If you withdraw from one TFSA and deposit into another (instead of doing an official institution-to-institution transfer), the CRA counts the deposit as a new contribution. The withdrawal room won’t come back until next January, so you’re temporarily over-contributed.

The penalty

The CRA charges 1% per month on the excess amount. Not 1% total. 1% per month, for every month the excess sits in the account.

If you’re $8,000 over your limit and it takes you four months to notice, that’s $80 per month, or $320 in penalties. If you don’t notice for a full year, it’s $960. On money that was yours to begin with.

The penalty is calculated on the highest excess amount in each month. So even if you partially fix the problem, you owe the full penalty for any month where an excess existed.

This is not a gentle reminder from the CRA. It’s an automatic assessment, and they will send you a bill.

How to check your room

The most reliable way to check your TFSA contribution room is through CRA My Account. Log in, go to the TFSA section, and it will show your total room, your contributions, and your withdrawals.

One important caveat: the CRA’s numbers can be delayed. Financial institutions report TFSA transactions to the CRA, but the data sometimes takes months to show up. If you contributed in October, the CRA’s system might not reflect it until February or March of the following year.

This means the number on CRA My Account is sometimes wrong, or at least not current. If you’ve made recent contributions or withdrawals, you may need to do your own math to get an accurate picture. Keep your own records. A simple spreadsheet or even a note on your phone listing every contribution and withdrawal, with dates, can save you from a costly mistake.

How to fix an over-contribution

If you realize you’ve over-contributed, the first step is to withdraw the excess amount as soon as possible. Every month the excess stays in the account is another 1% penalty, so speed matters.

After removing the excess, you’ll need to file Form RC243, the TFSA return, and pay the penalty for the months you were over-contributed. The CRA may send you this form automatically if they detect the issue, or you may need to file it yourself.

If the over-contribution was a genuine mistake, and you took reasonable steps to fix it promptly, you can request a waiver. The CRA does grant waivers in cases where the over-contribution resulted from a reasonable error and was corrected quickly. Include a letter explaining what happened, when you discovered it, and what you did to fix it. There’s no guarantee, but the CRA has been known to waive penalties for first-time, honest mistakes.

How to prevent it

The simplest prevention is knowing your room before you contribute. Check CRA My Account at the start of each year, keep your own records throughout the year, and be especially careful if you make any withdrawals.

If you withdraw from your TFSA mid-year, write down the amount and the date. Do not recontribute that amount until January of the following year unless you have unused room to absorb it. This is the single most important rule to remember.

If you have TFSAs at multiple institutions, track them in one place. Add up your total contributions across all accounts and compare that to your total room. No single institution will warn you that you’ve gone over when the excess is spread across different banks.

For transfers between TFSAs, always request an official transfer through your financial institution rather than withdrawing from one and depositing into another. The official transfer doesn’t count as a withdrawal and recontribution, so it doesn’t affect your room.

The bigger picture

The TFSA is one of the best accounts available to Canadians. Tax-free growth, flexible withdrawals, no impact on government benefits. But the naming is misleading, the contribution room rules are unintuitive, and the penalty for getting it wrong is steep.

The frustrating part is that most over-contributions happen to people who are trying to do the right thing. They’re actively saving and investing, moving money around, using their accounts. The penalty system punishes a paperwork misunderstanding the same way it would punish deliberate abuse.

Know your room, track your transactions, and be careful with mid-year withdrawals. That’s really all it takes to stay on the right side of the rules. And if you do make a mistake, fix it fast. The longer you wait, the more it costs. It’s one of the things I wanted Greenline to help with: seeing your TFSA alongside everything else, so nothing slips through the cracks.