Overcontributing to a TFSA

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A recent article in Advisor.ca reported that TFSA overcontribution penalties collected by CRA in 2024 amounted to 166 MILLION dollars. That money is Canadians’ hard-earned savings that are being allocated to penalties rather than their financial futures. Sadly, I think most of these costs are due to simple mistakes or misunderstandings with TFSA contribution room instead of taxpayers intentionally trying to avoid taxes by misusing their TFSA.

Let’s unpack some common slip-ups I see with TFSAs and how you can avoid adding to this sum in 2025 and 2026.

Picture this: you are on top of your savings and investing game. January 1 rolls around and you throw the full $7,000 of new contribution room into your TFSA. Nice work! Your account is sitting pretty at $100,000.

While TFSAs can be an incredible long-term retirement planning tool, often they’re used for mid-term saving and investing, like for car or home purchases.

In June you need $30,000 for a car, so you pull that money out of your TFSA. A month later, you get a $10,000 bonus at work and think, “Perfect, I’ll pop this in the TFSA since I just took money out.”

Why is this a mistake? The CRA does not give you that withdrawal room back until January 1 of the following year. So, by putting in that $10,000 bonus in July, you are actually over the limit by $10,000 until 2026. This is a weird quirk of these accounts, but it’s incredibly important to ensure you’re not paying undue penalties. A common misconception with TFSAs is that you can make deposits and withdrawals from the accounts ad-hoc without affecting TFSA room, but that’s not the case. A withdrawal isn’t reflected in the contribution room until the subsequent calendar year.

In this case, once the TFSA was maximized with $7,000, the contribution room was zero. Once that withdrawal was made, the contribution room was still zero, until the next year when the room is added back. Therefore, the account is overcontributed by $10,000 until January 1. At that time, the $30,000 withdrawal is added to the contribution room, plus the new $7,000 of annual room (-$10,000 + $30,000 + $7,000 = $27,000).

Let’s review the timeline:

The CRA calculates the penalty based on the amount overcontributed per month, and the tax rate is 1%. So, the penalty for July 2025 is $100 ($10,000 * 1% = $100). Every single month a new 1% tax is calculated, so by being overcontributed for 6 months, the total penalty is $600.

In previous years I recall that CRA would often send “education letters” to taxpayers informing them of these mistakes rather than jumping straight to a penalty, but that seems to be less common today.

Other classic mistakes? Forgetting you already contributed (hello, January brain fog). Doubling up on your $7,000 contribution would cost $840 in penalties over a year. Or juggling two TFSAs and losing track of deposits. You might feel that it would be impossible to lose track of deposits into accounts, but you’d be surprised at how often I see it and how common it is. And really, there’s no shame in it at all! While you’re allowed to have multiple TFSA accounts, but unless there is a really solid reason to have one, a simple system to avoid this is to only have one TFSA account.

TFSAs are fantastic. They are flexible, powerful, and can do heavy lifting in your long-term plan. But the rules are quirky. Keeping an eye on contribution rules is the difference between enjoying all the benefits on paying expensive penalties.