TFSA over-contribution penalty: stop the 1% tax and ask for a waiver

How does the TFSA over-contribution penalty work?

The TFSA over-contribution penalty is a 1% tax on the highest excess TFSA amount in your account in each month. An excess TFSA amount is any contribution above your available room at that moment. There is no grace amount: even $100 over is taxed, and the tax repeats every month until the excess is gone or new room absorbs it. A deliberate over-contribution is treated more harshly: income reasonably attributable to it counts as a TFSA advantage, which is taxed at 100%.

Timing matters more than size. At 1% a month, a $2,000 excess costs $20 if it is removed in the month it happened, and $80 if it stays for four months. A month counts in full even if the excess was only there for one day.

To estimate your own tax, multiply the largest excess in each month by 1% and add the months together, starting with the month the excess began and ending with the month you removed it.

Why did I over-contribute after a withdrawal?

Most TFSA excess contribution penalties come from putting money back in the same year it was taken out. A withdrawal is added back to your room only on January 1 of the following year. Until then, re-depositing it uses whatever room you have left, and if that is zero, the re-deposit is an excess.

Worked example

1. On January 5, 2026 Marc contributes $7,000, using all his room.
2. On March 10, 2026 he withdraws $5,000 to pay a bill.
3. On May 15, 2026 he puts the $5,000 back. He has no room, so he now has a $5,000 excess.
4. If he withdraws the $5,000 on August 20, he owes 1% for May, June, July and August: $200.
5. If he leaves it until year end, he owes 1% for May through December: $400. On January 1, 2027 the March withdrawal plus the 2027 limit restore enough room to end the excess.

How do I remove an excess TFSA amount?

Withdraw the full excess as soon as you notice it. The CRA says to take out the whole amount, because a partial withdrawal only lowers the tax base for the following month and the 1% still applies to whatever remains.

1. Work out your room: January 1 room from CRA My Account, minus contributions made since January 1. Form RC343 helps with the math.
2. Compare that with what you have contributed this year to find the excess.
3. Ask your issuer for a withdrawal of at least the excess, in cash, from the TFSA.
4. Keep the withdrawal confirmation. You will need the date and amount for Schedule A.
5. Do not re-contribute the withdrawn excess later in the year.

The part of a withdrawal that removes an excess is called the qualifying portion of the withdrawal. Unlike an ordinary withdrawal, it is not added back to your room the next January. For how room is rebuilt each year, see our TFSA contribution limit page.

How do I file the TFSA return, Form RC243?

Anyone who owes tax on an excess TFSA amount must file Form RC243, Tax-Free Savings Account (TFSA) Return, with Form RC243-SCH-A, Schedule A: Excess TFSA Amounts. Both are due, along with payment, by June 30 of the year after the excess arose. For an excess in 2026, that is Wednesday, June 30, 2027.

1. List each month's highest excess amount on Schedule A.
2. Total the 1% tax for each month and carry it to RC243.
3. Send the forms through the Submit documents service in CRA My Account, or by mail to the TFSA Processing Unit at the Sudbury or Winnipeg tax centre listed on the form.
4. Pay the balance by June 30 to avoid interest. When you pay, choose TFSA as the payment type under the "Other benefit, tax, fee or amount owing" category.

The RC243 is separate from your T1 income tax return. Filing your T1 on time does not satisfy it, and a missed RC243 can bring late-filing penalties and interest on top of the 1% tax.

What letters does the CRA send about TFSA excess amounts?

The CRA usually contacts you the year after the excess arose, once financial institutions have filed their TFSA records for the prior year by the end of February. It sends either an educational letter or a notice of assessment.

• Educational letter: explains the over-contribution and its effect on your room. If you already removed the excess, no further action is needed; if not, remove it immediately.
• Notice of assessment: shows when the excess began, how long it lasted, and the tax, penalties and interest owed. If you disagree with the figures, you have 90 days from the notice date to file a formal objection with Form T400A or a signed letter. The CRA strongly recommends asking for a waiver or cancellation of the TFSA tax before you file an objection.

Can the CRA waive the TFSA over-contribution penalty?

Yes. The CRA can waive or cancel all or part of the tax when it decides that doing so is fair. It looks at whether the tax arose from a reasonable error, whether the same transaction also created another tax, and whether amounts have been paid out of the TFSA. A TFSA over contribution penalty waiver is requested by letter, not by a dedicated form. The letter should explain why the excess happened and why it would be fair to cancel the tax.

1. Write a signed letter with your name, social insurance number, the tax year and the amount of tax you want waived.
2. Explain what happened in plain terms: for example, that you re-deposited a withdrawal believing the room was already restored, or that your issuer processed a transfer as a withdrawal.
3. Show that you removed the excess promptly, with dates. Attach account statements and the withdrawal confirmation.
4. Send it through Submit documents in CRA My Account, or by mail to the TFSA Processing Unit at the Sudbury Tax Centre (Post Office Box 20000, Station A, Sudbury ON P3A 5C1) or the Winnipeg Tax Centre (Post Office Box 14000, Station Main, Winnipeg MB R3C 3M2).
5. If you disagree with the decision, you can ask for a second review the same way. You have 30 days from the decision letter to apply to the Federal Court for judicial review.

Relief for penalties and interest in other situations, such as serious illness, goes through the taxpayer relief provisions. Our RC4288 taxpayer relief request page explains that process.

Does the same penalty apply to an FHSA or RRSP?

The First Home Savings Account uses the same 1% monthly tax on the highest excess, but you can remove an FHSA excess tax-free with a designated withdrawal on Form RC727, and the excess shrinks when new room arrives on January 1. The RRSP allows a $2,000 cushion first. Our FHSA rules guide and the RRSP, TFSA and FHSA overview compare all three.