TFSA Overcontribution Penalty 2026 — 1% per Month Rule & How to Fix It (CRA)

TFSA overcontribution is one of the most expensive accidental tax mistakes in the Canadian system. The 1% per month penalty tax sounds small — until you realise it compounds month after month for every month the excess sits in the account, regardless of whether the money made any investment return at all. Even a few thousand dollars of excess can generate hundreds of dollars in penalties over a year.

Here is how the rule works, the specific scenarios that trigger it, and exactly what to do if the CRA says you have overcontributed.

The Rule: 1% per Month, Every Month the Excess Exists

Under section 207.02 of the Income Tax Act, any TFSA contribution above your available contribution room is an “excess TFSA amount” and is taxed at:

1% per month of the highest excess amount in the account during that month

Key details:

The tax is calculated on the highest excess during the month — even if the excess sits in the account for a single day, you owe 1% for the entire month.
The tax continues each month until the excess is withdrawn or until new room opens up the following January 1 to absorb it.
The tax is assessed via Form RC243, TFSA Return, which is due by June 30 of the year following the excess.
Interest accrues on the unpaid penalty at the CRA’s prescribed rate (~9% in 2026) starting July 1.

The Four Most Common Triggers

1. Recontributing in the same year after a withdrawal

This is the single most frequent TFSA mistake. If you withdraw money from your TFSA on, say, March 15, 2026, the room does not come back in 2026. It comes back on January 1, 2027. Putting it back in May 2026 triggers an overcontribution if you had already maxed out.

Example: You contribute your full $7,000 TFSA limit on January 2, 2026. In May you withdraw $3,000 for a car repair. In October the money comes back into your bank account and you transfer $3,000 into your TFSA. You have just overcontributed $3,000 — that room does not reappear until January 1, 2027.

2. Contributing at multiple institutions and losing track

If you hold TFSAs at two banks and a broker, and each one automatically deposits monthly, it is easy to exceed the annual limit without realising it. Institutions do not coordinate — the CRA aggregates your total contributions from T4FFI slips filed by each issuer.

3. Forgetting carry-forward room is shared across all your TFSAs

Your contribution limit is a single personal number, not a per-account number. $7,000 of 2026 room is $7,000 total across every TFSA you own, not $7,000 per account.

4. Trusting a stale CRA My Account figure

CRA My Account displays your TFSA contribution room “as of January 1” of the current year. It does not update for contributions made during the current year. If you check it in June, the number you see is still the January 1 figure — minus any activity the CRA has already processed (which may lag months). Using that figure to decide whether to top up can easily result in double-counting.

How to Calculate Your Exact Excess

The CRA does not always catch overcontributions immediately. The onus is on you to know your position. Here is the workflow:

Log into CRA My Account → Go to “Tax returns” → “TFSA” → “Transaction summary.”
Download every year’s transaction summary. The CRA shows contributions and withdrawals reported by each issuer, year by year. Some older or transferred accounts may be missing — cross-check with your own records.
Compute cumulative room. Start from your first eligibility year (age 18, or 2009 if older) and add each year’s limit.
Subtract net contributions (contributions minus withdrawals, treating each year as a closed cycle — withdrawals only regenerate room in the following year).
Compare to your current balance contributed (not market value — only what you have put in).

Year	Annual Limit	Your Contributions	Your Withdrawals	Net Room Used
2009–2022 cumulative	$81,500	$60,000	$10,000	$50,000
2023	$6,500	$6,500	$0	$6,500
2024	$7,000	$7,000	$0	$7,000
2025	$7,000	$7,000	$5,000	$7,000 (withdrawal returns in 2026)
2026	$7,000	?	?	carry-forward $5,000 + new $7,000 = $12,000 available

In the example above, the $5,000 withdrawn during 2025 became available as new room on January 1, 2026, on top of the $7,000 annual limit. If you contributed $13,000 in 2026, you would have a $1,000 excess.

Worked Example: What an Overcontribution Actually Costs

Assume you accidentally contribute $3,000 over your limit on February 10, 2026, and do not catch the error until you withdraw the excess on September 20, 2026.

Month	Highest excess during month	1% penalty
February 2026	$3,000	$30
March 2026	$3,000	$30
April 2026	$3,000	$30
May 2026	$3,000	$30
June 2026	$3,000	$30
July 2026	$3,000	$30
August 2026	$3,000	$30
September 2026 (excess still present early in month)	$3,000	$30
Total		$240

You owe $240 in penalty tax on a $3,000 excess that produced no return. That is an 8% hit for an honest mistake, payable by June 30, 2027 via Form RC243.

Had you left the excess untouched for a full year, you would owe $360 — 12% of the excess. Even if your TFSA returned 10% that year on the $3,000 (an unusually good result), you would roughly break even after the penalty.

How to Fix an Overcontribution

Step 1: Withdraw the excess immediately

The 1% penalty runs until the month the excess is fully out of the TFSA. Every day of delay is another month’s exposure at the next month-end. Note that withdrawing the excess does not restore your room in the current year — that withdrawal only regenerates room on January 1 of the following year.

Step 2: File Form RC243 and pay the tax

Form RC243, TFSA Return is due June 30 of the year after the excess arose. On it you calculate the monthly excess, the 1% tax, and pay. Penalties for not filing RC243 on time: 5% of the balance + 1% per month, mirroring the T1 late-filing rule.

Step 3: Request a waiver with Form RC4288 (if circumstances warrant)

The CRA has discretion under section 207.06(1) to waive all or part of the 1% penalty if:

The excess arose because of a reasonable error, AND
The excess is withdrawn without delay once identified

Common “reasonable error” grounds that have succeeded:

Issuer administrative error (e.g., a trade-in of shares was reported as a contribution)
Genuine confusion over whether a transfer was “in-kind” or a new contribution
Automated recurring contributions that continued after an expected salary cut
Reliance on a written CRA response that turned out to be wrong

Grounds that typically fail:

“I did not know the rule”
“CRA My Account showed old information” (CRA expects you to know the figure is as-of-January-1)
Continuing to hold the excess after discovery

File Form RC4288, Request for Taxpayer Relief with supporting documents (issuer statements, correspondence, dates). The CRA may take 6-12 months to decide.

Prevention: Build a Defensive Process

Consolidate TFSAs into one institution where possible to eliminate aggregation risk.
Never put money back in the same calendar year you withdrew it, unless you know you still have unused room.
Log each contribution with date, amount, and source account in a simple spreadsheet. Reconcile against CRA My Account quarterly.
If automated, set contributions to stop at a dollar value below the annual limit, leaving a buffer.
Before any large transfer, model the effect with our TFSA Contribution Room Calculator.

FAQ

Does the 1% penalty apply to investment growth inside the TFSA?

No. The penalty applies only to contributions that exceed your room. Growth on an existing balance — even on money that was itself an overcontribution — does not trigger additional penalty. The penalty tracks the contribution amount, not the market value.

What if my TFSA loses money — does my excess decrease?

No. The excess is measured against contributions, not market value. A $5,000 excess that becomes worth $2,000 is still a $5,000 excess for penalty purposes. Only a withdrawal reduces the excess.

I already have TFSA room of $10,000 carried forward. Can I use it to absorb a $3,000 overcontribution?

Unused carry-forward room is already part of the calculation that produced the “excess” figure. If the CRA has told you there is $3,000 excess, it means you contributed $3,000 over your total available room including carry-forward. New room becomes available each January 1.

Can I transfer an overcontributed amount to another TFSA to reset things?

No. Direct TFSA-to-TFSA transfers between institutions do not trigger new contributions if done correctly (Form T2033 for in-kind, or “direct transfer” at your institution). But the excess follows the money. The only way out is withdrawal.

How will I know if the CRA identified an excess?

The CRA sends an Excess Amount Letter — usually arriving June-September for the prior year’s excess. The letter states the amount, months affected, and penalty owed, and demands Form RC243. If you have not received one, you can still proactively self-assess and file.