I overcontributed to my TFSA by accident — how bad is the 1%-per-month penalty really?
Worse than most people expect. The CRA charges 1% per month on the highest excess amount in that month — and a single day counts as a full month. A $3,000 excess sitting for six months costs $180, and the meter keeps running until the excess is actually out. Unlike RRSPs, TFSAs have no $2,000 buffer: one dollar over the limit is taxable. The fix is simple — withdraw the excess immediately — but you still owe the tax for every month it was in, and you still have to file Form RC243.
How the penalty compounds: highest excess, whole months
The rule (from the CRA's own Schedule A of Form RC243): "If, at any time in a month, you have an excess TFSA amount, you are subject to a 1% tax on your highest excess TFSA amount in that month."
| Situation | Tax for that month |
|---|---|
| $3,000 excess for all of March | 1% × $3,000 = $30 |
| $3,000 excess for March 1–3 only | Still $30 — one day counts as the whole month |
| $3,000 excess March, topped up to $5,000 on March 20 | 1% × $5,000 = $50 (highest excess in the month) |
| Excess withdrawn March 5 | March is taxed; April stops — if nothing else is over |
A worked example: $3,000 excess, unnoticed for 6 months:
| Month | Highest excess | Tax |
|---|---|---|
| Jan | $3,000 | $30 |
| Feb | $3,000 | $30 |
| Mar | $3,000 | $30 |
| Apr | $3,000 | $30 |
| May | $3,000 | $30 |
| Jun | $3,000 | $30 |
| Total | $180 |
Leave it a full year and it's $360 — 12% of the excess, gone. And the CRA also charges interest on unpaid excess tax, so the real cost is higher.
No buffer — the RRSP contrast
RRSPs give you a $2,000 lifetime buffer: contributions up to $2,000 over your deduction limit attract no penalty (the CRA's T1-OVP materials state the threshold as "deduction limit plus $2,000"). TFSAs have no such cushion. Any excess TFSA amount — even $100 — is subject to the 1% monthly tax. People who are used to the RRSP's forgiveness get burned the first time they apply the same thinking to a TFSA.
Stopping the clock the right way
- Withdraw the excess now. Don't wait for the CRA's letter — CRA issuers report transactions only by end of February the following year, so an excess can sit for months before you're notified. The tax applies for the month of withdrawal (any day in the month counts), then stops the next month if the excess is fully gone.
- Don't re-contribute it. Withdrawing the excess doesn't create new contribution room — if you put the money back in the same year, you're over again.
- File Form RC243 (TFSA Return) with Schedule A, generally by June 30 of the following year. Even if you withdrew everything, filing is mandatory — skip it and the CRA will assess you anyway, later in the summer, with possible late-filing penalties on top.
- Consider asking for relief. If the excess came from a reasonable error and you withdrew it without delay, you can write to the CRA requesting a waiver — first-time, good-faith mistakes are the strongest cases. Relief is discretionary, not guaranteed.
Frequently asked questions
My CRA account says I have room. Can I trust it?
Not fully. My Account doesn't reflect current-year contributions and depends on issuer reports filed months late. Keep your own running tally of contributions, withdrawals, and room — the CRA expects you to.
I contributed in January when the new $7,000 annual room kicked in. Was that wrong?
No — the annual TFSA dollar limit is added to your room each year ($7,000 for 2024 through 2026). The problem is only contributing more than your total available room (unused room carried forward + new annual limit + prior-year withdrawals re-added). Track the total, not just the annual limit.
Does the 1% apply to gains on the excess too?
The 1% tax is on the excess amount itself. But income earned on excess contributions can face a separate 100% tax on advantages — another reason to get the excess out fast and keep it simple.
Sources
- https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/contributing/overcontribute.html
- RC243-SCH-A, Schedule A – Excess TFSA Amounts (1% on highest excess in the month): http://www.canada.ca/content/dam/cra-arc/formspubs/pbg/rc243-sch-a/rc243-sch-a-25e.pdf
- RRSP $2,000 buffer (T1-OVP materials, Canada.ca): https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t1-ovp-s/t1-ovp-s-fill-24e.pdf
- https://www.wealthsimple.com/en-ca/learn/tfsa-over-contribution