TFSA Over-Contribution Penalty

If you contribute more to your TFSA than your available room allows, the CRA charges a penalty of 1% per month on the excess amount. That penalty keeps accruing every month the over-contribution stays in the account.

For example, if you’re $5,000 over your limit, you’ll owe $50 every single month until you withdraw the excess. The CRA doesn’t send you a friendly reminder either. You’ll find out when you file your taxes or when you get a letter in the mail.

Why it matters

Over-contributions are surprisingly common. The most common cause is withdrawing from your TFSA and then re-contributing in the same calendar year. When you take money out of a TFSA, that room doesn’t come back until January 1 of the following year. If you withdraw $10,000 in March and put it back in June, you’ve just over-contributed by $10,000.

Transfers between TFSAs at different institutions can also cause problems if they’re not done properly. Moving money by withdrawing from one and depositing into another (instead of doing a direct transfer) uses up room in ways people don’t expect.

The best way to avoid this is to know your exact contribution room. You can check it through your CRA My Account online. Keep in mind that the CRA’s numbers can lag behind by a few months, so if you’ve made recent contributions, you’ll need to track those yourself.

If you realize you’ve over-contributed, withdraw the excess as soon as possible. The sooner you fix it, the fewer months of penalties you’ll owe.