The CRA charges 1% per month on TFSA overcontributions, but most people can fix it in time
The withdrawal trap is the one that catches almost everyone. You pull $10,000 from your TFSA in March to cover a car repair, then re-contribute it in June when a bonus hits your chequing account. By July, you've got a letter from the Canada Revenue Agency explaining that you now owe penalties.
The rule is unforgiving: withdrawals do not restore contribution room until January 1st of the following year. That $10,000 you took out in March stays unavailable until the next calendar flip. Put it back early and the CRA treats it as an overcontribution, charging 1% per month on the excess for as long as it sits in the account.
That penalty compounds fast. A $5,000 overcontribution left in place for six months costs you $300. Not devastating, but completely avoidable. Most people get the letter, panic, and assume they're locked into a multi-month penalty cycle. They aren't.
The fix is immediate withdrawal
The moment you realize you've overcontributed, withdraw the excess. Today. The penalty stops the month the money leaves the account. Waiting for the CRA to mail you a formal assessment just extends the bleeding. A "qualifying withdrawal" is the technical term, and it works retroactively if you move quickly.
Here's what that looks like in practice. Say you contributed $7,000 in January 2026, your full annual limit, then withdrew $4,000 in March for an emergency. In May, you re-contributed $4,000. You now have an excess of $4,000 because your contribution room for 2026 is exhausted. The CRA will charge 1% monthly starting in May. If you catch the mistake in June and pull the $4,000 back out, you stop the penalty after two months and owe $80 total.
If you wait until the CRA sends you a Proposed TFSA Return in spring 2027, you're looking at twelve months of penalties: $480.
The CRA's tracking system lags. Your "My Account" portal shows contribution room as of January 1st based on data from the previous year. It does not update in real time when you make a mid-year contribution or withdrawal. That lag is why so many people trip over their own balances. They check the portal in April, see $11,000 of room, and deposit $7,000 without realizing they already maxed out in January.
Multiple accounts make it worse
If you hold TFSAs at two or more institutions (a big bank and Wealthsimple, say), the CRA aggregates them, but you have to track the sum yourself. Neither institution knows about the other. You can hit your limit at one bank, forget, and contribute to the second. The penalty applies to the combined total.
Transfers between TFSAs must be done via direct transfer between institutions. If you withdraw cash to your chequing account and then deposit it into a new TFSA elsewhere, the CRA treats the deposit as a fresh contribution. That's another common trigger.
When the CRA might waive the penalty
The agency does grant relief, but only under specific conditions. First-time mistakes get the softest treatment, especially if you withdrew the excess before the CRA contacted you. Submit Form RC4288 (Request for Taxpayer Relief) and explain what happened. Include proof that the overcontribution was corrected promptly.
Bank errors do not count as automatic grounds for a waiver. If your advisor miscalculated your room, you can file for relief, but the CRA holds you responsible. You may need to recover the loss from the institution separately.
One edge case: if the excess funds grew significantly while sitting in the account (a stock doubled, say), the 1% penalty might still be cheaper than the tax you'd have paid on those gains in a non-registered account. The CRA can strip "advantage" gains if they determine the overcontribution was intentional, but most cases don't reach that threshold.
The real lesson is simpler. Track your own room. Withdrawals reset on January 1st. Multiple accounts count together. Move fast when you spot a mistake. The penalty is avoidable if you fix it before the letter arrives.
The withdrawal trap is the one that catches almost everyone. You pull $10,000 from your TFSA in March to cover a car repair, then re-contribute it in June when a bonus hits your chequing account. By July, you've got a letter from the Canada Revenue Agency explaining that you now owe penalties.
The rule is unforgiving: withdrawals do not restore contribution room until January 1st of the following year. That $10,000 you took out in March stays unavailable until the next calendar flip. Put it back early and the CRA treats it as an overcontribution, charging 1% per month on the excess for as long as it sits in the account.
That penalty compounds fast. A $5,000 overcontribution left in place for six months costs you $300. Not devastating, but completely avoidable. Most people get the letter, panic, and assume they're locked into a multi-month penalty cycle. They aren't.
The fix is immediate withdrawal
The moment you realize you've overcontributed, withdraw the excess. Today. The penalty stops the month the money leaves the account. Waiting for the CRA to mail you a formal assessment just extends the bleeding. A "qualifying withdrawal" is the technical term, and it works retroactively if you move quickly.
Here's what that looks like in practice. Say you contributed $7,000 in January 2026, your full annual limit, then withdrew $4,000 in March for an emergency. In May, you re-contributed $4,000. You now have an excess of $4,000 because your contribution room for 2026 is exhausted. The CRA will charge 1% monthly starting in May. If you catch the mistake in June and pull the $4,000 back out, you stop the penalty after two months and owe $80 total.
If you wait until the CRA sends you a Proposed TFSA Return in spring 2027, you're looking at twelve months of penalties: $480.
The CRA's tracking system lags. Your "My Account" portal shows contribution room as of January 1st based on data from the previous year. It does not update in real time when you make a mid-year contribution or withdrawal. That lag is why so many people trip over their own balances. They check the portal in April, see $11,000 of room, and deposit $7,000 without realizing they already maxed out in January.
Multiple accounts make it worse
If you hold TFSAs at two or more institutions (a big bank and Wealthsimple, say), the CRA aggregates them, but you have to track the sum yourself. Neither institution knows about the other. You can hit your limit at one bank, forget, and contribute to the second. The penalty applies to the combined total.
Transfers between TFSAs must be done via direct transfer between institutions. If you withdraw cash to your chequing account and then deposit it into a new TFSA elsewhere, the CRA treats the deposit as a fresh contribution. That's another common trigger.
When the CRA might waive the penalty
The agency does grant relief, but only under specific conditions. First-time mistakes get the softest treatment, especially if you withdrew the excess before the CRA contacted you. Submit Form RC4288 (Request for Taxpayer Relief) and explain what happened. Include proof that the overcontribution was corrected promptly.
Bank errors do not count as automatic grounds for a waiver. If your advisor miscalculated your room, you can file for relief, but the CRA holds you responsible. You may need to recover the loss from the institution separately.
One edge case: if the excess funds grew significantly while sitting in the account (a stock doubled, say), the 1% penalty might still be cheaper than the tax you'd have paid on those gains in a non-registered account. The CRA can strip "advantage" gains if they determine the overcontribution was intentional, but most cases don't reach that threshold.
The real lesson is simpler. Track your own room. Withdrawals reset on January 1st. Multiple accounts count together. Move fast when you spot a mistake. The penalty is avoidable if you fix it before the letter arrives.
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