Your TFSA over-contribution: what the penalty actually costs

Most people meet this number in one of two ways. Either they sat down with their own statements and the total came out higher than the room they thought they had, or a notice arrived and told them.

The second way costs more, and the reason is in the mechanics rather than in anyone’s carelessness. The TFSA over-contribution penalty is charged by the month, and the clock does not wait for anyone to be informed.

The TFSA over-contribution penalty: the rate, and what it is charged on

The CRA charges 1% a month on an excess TFSA amount. Its wording is exact about the base: “Any excess amount in your TFSA is taxable at a rate of 1% per month. This is calculated on the highest amount of excess in your account for each month it remains” (canada.ca).

Two words in that sentence do the work. Highest means a partial withdrawal part-way through a month does not reduce that month’s tax. Remains means the tax is not a one-time charge on the mistake, it is a monthly charge on the condition.

So the size of the penalty is not set by how much you over-contributed. It is set by how much you over-contributed and how long you left it there.

The CRA’s own worked examples

The agency publishes two, and they are worth reading in its numbers rather than anyone else’s.

The first: “If you over-contribute $2,000 in June and remove it in September of the same year, you will owe $20 per month for June, July, August and September (a total of $80). But if you remove the excess amount later in June, the same month of the over-contribution, the 1% tax still applies, but you would only owe $20” (canada.ca).

Same mistake, same amount, four months apart in the fixing: $80 against $20.

The second example is the one people find counterintuitive: “If you over-contribute $6,000 in August and then withdraw $4,000 in mid-September, you will still owe $60 per month for both August and September (a total of $120). This is because the 1% tax applies to the highest amount of excess that is in the account in a month” (canada.ca).

A partial fix bought nothing that month. And on the same page’s arithmetic, the remaining $2,000, left through October, costs another $20: “If you then withdraw the remaining excess amount of $2000 in October, you will owe $20 tax for that month” (canada.ca).

The CRA’s two examples, side by side:

CRA’s example	Fixed when	Tax owed
$2,000 excess in June	September of the same year	$20 × 4 months = $80
$2,000 excess in June	Later in June, same month	$20
$6,000 excess in August	$4,000 out mid-September	$60 for August + $60 for September = $120
The $2,000 that stayed	October	$20 more for October

The practical reading of both examples is the same. Take the whole excess out, and take it out inside the current month if you can.

Deliberate is a different category

There is a harsher tier, and it is worth knowing it exists rather than meeting it. The CRA states that “Excess amounts that are a result of deliberate over-contribution may be taxed at the 100% advantage rate” (canada.ca).

Nothing in this post is about that case. It is about the ordinary one, where the arithmetic was wrong.

How you find out, and when

Here is the part that decides the size of the bill. Notification is neither certain nor prompt. The CRA says it “may notify you if you have over-contributed to your TFSA”, and that “We send this notification to some TFSA holders through their CRA account or by mail in late spring, after we are informed of the excess by the TFSA issuer” (canada.ca).

Being informed by the issuer has its own schedule. “TFSA issuers must submit a summary of all the transactions that a holder makes in a calendar year by the end of February of the next calendar year”, and the agency draws the conclusion itself: “It is therefore possible for your TFSA to have an excess amount for several months before you are notified about it” (canada.ca).

Read those two schedules against the monthly rate and the shape of the problem is clear. The excess can sit for months before anyone tells you, and every one of those months is billable.

The CRA’s instruction on the same page is blunt: “It is important to keep and maintain your own records, and to track your contributions closely. You should withdraw any excess amount as soon as possible to minimize penalties” (canada.ca).

What you have to file

Withdrawing the excess ends the monthly charge. It does not end the paperwork.

You file a TFSA Return, Form RC243 (canada.ca), with the excess-amounts schedule attached. The deadline is fixed: “Submit your TFSA Return, any additional forms, and your payment to the CRA by June 30 of the calendar year after the year the tax applies” (canada.ca).

You file whether or not a notice ever reached you. The CRA is explicit on both points: “Whether you receive a notification or not, you will be required to file a TFSA Return for the excess amount. If you do not file a TFSA Return, you may receive a TFSA notice of assessment (NOA) later in the summer” (canada.ca).

The order of operations

1. Work out the excess from your own statements, across every TFSA you hold at every institution. The CRA’s formula for that arithmetic is in how to check your TFSA contribution room when the CRA figure is behind.
2. Withdraw the full excess, as soon as possible. The charge is monthly, so the month you act in is the unit that matters. What that withdrawal does to your room, and when, is in TFSA withdrawal rules: when the room you took out comes back.
3. Keep the dated record of the withdrawal.
4. File the return by June 30 of the following year.

Step one is where the TFSA over-contribution penalty is really decided, and it is the step that needs a record you already have. The room figure in your CRA account is a report of what institutions filed for a prior year, which is why the agency tells you to calculate from your own records instead (canada.ca).

Keep the record that answers this before it costs anything

Hudson Bay Finance makes a contribution-room tracker that keeps your own dated record of contributions and withdrawals, current to your last entry rather than to anyone’s filing cycle. TFSA tracking is free.

Open the tracker

If you only want this year’s arithmetic, the free TFSA contribution limit page carries the current dollar limit with the CRA page it came from.