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Asking the CRA to waive a TFSA penalty: what the request has to show

The CRA may waive or cancel TFSA tax if it decides that is fair. It reviews three things: whether the tax arose from a reasonable error, whether another tax also applies, and how much has been withdrawn to correct it.

The CRA “may waive or cancel all or part of the tax on a TFSA if we determine that it is fair to do so.” The request is a letter, and the agency names the three things it reviews. Nothing about the process is automatic, and nothing about it is a form.

The three things the CRA says it reviews

Quoted in full, because the list is the whole test: “We will review your situation to determine: If the tax arose because of a reasonable error. The extent to which the transaction(s) that lead to the tax also lead to another tax under the Income Tax Act. The extent to which withdrawals have been made from the TFSA to correct the error” (canada.ca).

The third item is the one a request can still change after the fact. It is measured in dollars and dates, and it is about what you did once you knew.

What the two words mean

They are not interchangeable, and which one applies depends only on timing. The CRA: “A waiver is when the CRA grants a relief of penalties and interest that you would otherwise have to pay before they are assessed or charged to you. A cancellation is when the CRA grants a relief of the penalties and interest that have already been assessed or charged to you” (canada.ca).

How the request is made

“To request a waiver or cancellation of the tax, send the CRA a letter that explains why the taxable situation happened and why it would be fair to waive or cancel the tax.” It goes through “Submit documents” in a CRA account, or by mail to the TFSA Processing Unit at the Sudbury Tax Centre or the Winnipeg Tax Centre (canada.ca).

A letter with no prescribed format is not a licence to be vague. The CRA’s three review points are the outline: what happened, what else it triggered, what has been taken back out and when.

What “the extent to which withdrawals have been made” is worth, worked

The tax the request is about is set out separately: “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).

The CRA’s own two examples show why a partial withdrawal reads badly on the third test. Over-contribute $2,000 in June and remove it in September and the tax is $20 per month for June, July, August and September, $80 in total; remove it later in June instead and it is a single $20. Over-contribute $6,000 in August, withdraw $4,000 in mid-September, and the charge is still $60 for both August and September, $120, because the month is measured at its highest point. The remaining $2,000 taken out in October costs $20 for that month (canada.ca).

Dates decide all of this. A request that can name the month each contribution and each corrective withdrawal fell in is describing exactly what the CRA is measuring.

One thing a waiver request will not reach

The CRA is explicit that not every excess is treated as an error: “Excess amounts that are a result of deliberate over-contribution may be taxed at the 100% advantage rate” (canada.ca).

The first review point is a reasonable error. That is the door the request has to go through.

If the answer is no

“If you do not agree with our decision about your request to waive or cancel the tax, you may request a second review”, through the same channels. After that, the CRA points to the Courts Administration Service or a local Federal Court Registry Office. A disagreement with the assessment itself is a different route: a notice of objection on Form T400A, within 90 days of the date on the notice of assessment (canada.ca).

Two different disputes, two different routes. A waiver asks the CRA to relieve a tax it calculated correctly; an objection says the calculation is wrong.

If the letter arrived before you knew there was a problem, start at the CRA letter about a TFSA over-contribution. The return and its deadline are in RC243 or T1-OVP: which form your situation needs, and what the tax adds up to is in what the TFSA over-contribution penalty actually costs.

The evidence trail the request rests on

Hudson Bay Finance makes a contribution-room tracker that keeps a dated record of every contribution and withdrawal, which is the material a waiver letter is built out of. TFSA tracking is free.

Common questions

Can the CRA cancel a TFSA over-contribution penalty?
The CRA states it may waive or cancel all or part of the tax on a TFSA if it determines that it is fair to do so. It reviews whether the tax arose because of a reasonable error, the extent to which another tax under the Income Tax Act also applies, and the extent to which withdrawals have been made to correct the error.
What is the difference between a waiver and a cancellation?
The CRA defines a waiver as relief from penalties and interest before they are assessed or charged, and a cancellation as relief from penalties and interest that have already been assessed or charged.
How do I make the request?
The CRA asks for a letter explaining why the taxable situation happened and why it would be fair to waive or cancel the tax, sent either through Submit documents in a CRA account or by mail to the TFSA Processing Unit in Sudbury or Winnipeg.
What if the CRA says no?
You may request a second review through the same channels. The CRA states that if you still disagree after the second review, you may apply to the Courts Administration Service or contact your local Federal Court Registry Office.

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Written by Mo Kechout All answers