Canada-wide Toll Free:
New Member Centre Coming Soon Book My Free 15-min Consult

News & Updates

TFSA Over Contributions Can Generate Big Penalties

Money can be withdrawn tax-free from a tax-free savings account, but remember the amount withdrawn isn't added back to your TFSA contribution room until the following year.

The Tax-Free Savings Account (TFSA), introduced in 2009, was thought to be one of the best new programs created by the federal government in years. Similar to a Registered Retirement Savings Plan (RRSP), TFSAs can contain different types of investments, such as Guaranteed Investment Certificates (GICs), bonds, mutual funds and stocks.

TFSAs were introduced with a $5,000 yearly contirbution limit. In 2013, that yearly limit was raised to $5,500 that can be contributed and allowed to grow tax-free. Money can be withdrawn tax-free and the amount withdrawn is added back to the TFSA contribution room in the following year.

Adding the withdrawal amount back to your contribution room is where confusion can arise and if misunderstood could result in penalties. If, at any time, your contributions exceed your TFSA contribution room for the year, you will be subject to the TFSA tax on excess contributions.

The tax is similar to the tax of 1% per month on excess RRSP contributions. For a TFSA, the 1% is on the highest excess amount in your account for that month. This tax will accumulate until the excess amount is withdrawn. Unlike RRSPs, there is no $2,000 “grace” over contribution amount for a TFSA.

If you have excess contributions you should withdraw the funds immediately to avoid any additional tax.

The 1% tax on an excess TFSA amount applies from the first dollar of excess contributions. It is also based on the highest excess TFSA amount in your account for each month in which an excess exists. This means that the 1% tax applies for a particular month even if an excess amount was contributed and withdrawn later during the same month.

If you have more than one TFSA, you can transfer funds directly from one of your TFSAs to another without affecting your contribution room, provided the transfer is completed by your financial institutions.

If you withdraw funds on your own from one TFSA and contribute those same funds to another TFSA, the re-contribution will be considered to be a new contribution. As a result, your TFSA contribution room will be affected and you may be subject to a tax on excess contributions.

Like an RRSP, the yearly contribution limit of $5,500 ($5,00 from 2009 to 2012) is cumulative for a TFSA. Any amount not used in a year is carried forward to the next year.


  • If you contributed $5,000 to your TFSA in 2009 and $4,000 in 2010, your contribution room for 2011 would have been $5,000 plus the $1,000 not contributed in 2010.
  • If you contributed the maximum $6,000 at the beginning of 2011 and then decided to withdraw $2,000 later in the year, you could have done this and not owed any taxes. However, if you tried to replace any of the $2,000 before the end of 2011, you would have over contributed, and you would be subject to penalties.
  • The $2,000 withdrawal from 2011 increases your contribution room for 2012, giving you a total allowable contribution room of $7,000 for the current year.

In addition to the 1% tax on over contributions in a TFSA, any earnings or increase in value reasonably attributable to “deliberate excess contributions” will be considered a tax advantage and taxed accordingly. The tax rate on an advantage is 50% of the income generated.