TFSA Over-Contribution Penalties in 2026: The 1% Per Month Rule Explained

Income Tax Act s.207.02

You contributed to your TFSA.
Then you transferred funds between accounts.
Or you recontributed too early after a withdrawal.

Then CRA sends a notice:

“You have excess TFSA contributions.”

Under ITA s.207.02, excess TFSA contributions are subject to a 1% per month penalty tax.

This is not interest.
It is a statutory tax.

Let us examine how it works — and how to avoid it.

 

First Principle: TFSA Contribution Room Is Strictly Tracked

Each Canadian resident over age 18 accumulates annual TFSA room.

Room is:

• Set annually by the federal government
• Cumulative if unused
• Increased the year after withdrawals

The key rule:

You cannot contribute more than your available TFSA room.

If you do, penalty tax applies.

 

The 1% Monthly Penalty (ITA s.207.02)

If you exceed your TFSA limit:

You pay 1% per month
On the highest excess amount in that month.

This continues until:

• The excess is withdrawn, or
• New contribution room becomes available.

This is 12% per year — not deductible.

 

Example Scenario

Available TFSA room: $50,000
Contribution made: $70,000

Excess = $20,000

Penalty:

1% × $20,000 = $200 per month

If excess remains for 6 months:

$200 × 6 = $1,200

The penalty continues until corrected.

 

Common Causes of Over-Contribution

TFSA over-contributions frequently occur because of:

• Recontributing withdrawn funds in the same calendar year
• Contributing before confirming CRA-reported room
• Transfers between financial institutions recorded incorrectly
• Multiple TFSAs not tracked centrally
• Becoming non-resident and continuing contributions

TFSA errors are more common than RRSP errors.

 

Withdrawals and Recontributions

When you withdraw from a TFSA:

You regain that contribution room:

On January 1 of the following year.

If you withdraw $20,000 in June 2026:

You cannot recontribute that $20,000 in 2026 unless you have unused room.

If you do:

It creates an excess contribution.

This is the most common mistake.

 

CRA Tracking Is Not Real-Time

CRA tracks TFSA room based on financial institution reporting.

That reporting:

• May lag
• May be incomplete
• May not reflect current-year activity

You are responsible for tracking contributions.

Not CRA.

 

What If Investment Growth Causes Overage?

Investment growth does not affect contribution room.

If your TFSA grows from $50,000 to $90,000:

There is no penalty.

Penalty applies only to excess contributions — not investment returns.

 

How to Correct an Over-Contribution

To stop the penalty:

1. Withdraw the excess amount immediately.
2. Notify CRA if necessary.
3. File Form RC243 if required to calculate and report tax.

Prompt correction minimizes monthly penalty.

 

Non-Residents and TFSA Contributions

If you become a non-resident and contribute to your TFSA:

Penalty applies:

• 1% per month on contributions made while non-resident
• Until withdrawn

TFSA room does not accrue during non-residency.

Departure planning must include TFSA review.

 

Death and TFSA

Upon death:

• TFSA ceases
• Tax-free status ends unless successor holder is spouse

Estate administration must account for this.

 

Owner-Manager Considerations

Entrepreneurial families often:

• Fund TFSAs for children
• Use TFSAs for investment income sheltering
• Coordinate corporate dividends with personal TFSA contributions

Poor coordination between dividend timing and TFSA room tracking can create excess.

Annual review is essential.

 

CRA Relief

Taxpayer Relief under ITA s.220(3.1) may be available in limited cases where over-contribution was due to reasonable error and corrective action was prompt.

However:

Relief is discretionary.

Do not rely on relief.

 

Common Misunderstandings

“CRA will stop me from over-contributing.”
Financial institutions do not validate your total room.

“If I withdraw, penalty disappears retroactively.”
Penalty applies monthly until withdrawn.

“It’s only 1%.”
1% per month equals 12% annually.

“Growth counts toward room.”
Growth does not affect contribution limits.

 

Strategic Planning for 2026

Before contributing:

• Confirm available TFSA room on latest Notice of Assessment
• Reconcile all accounts
• Track withdrawals and recontribution timing
• Coordinate with spouse and family contributions

TFSA discipline protects tax-free compounding.

 

Final Thoughts

Under ITA s.207.02, TFSA excess contributions are subject to a 1% per month penalty tax.

The penalty continues until the excess is withdrawn or new room becomes available.

For disciplined families and owner-managers, TFSA compliance is simple — but must be tracked intentionally.

At Shajani CPA, we integrate TFSA planning with dividend strategy, estate planning, and intergenerational wealth design.

Because tax-free growth should not be eroded by avoidable penalties.

Tell us your ambitions, and we will guide you there.

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2026 Shajani CPA.

Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning service.