Overcontributions to tax-free savings accounts (TFSA) continue to be a big problem for thousands of Canadians, as well as a source of increasing tax revenue for the

Canada Revenue Agency (CRA) as it relentlessly pursues the collection of penalty tax in the courts.

As a reminder, if you accidentally overcontribute to your TFSA you will face the overcontribution penalty tax, which is equal to one per cent per month for each month you’re accidentally over the limit. You can request that the CRA waive or cancel the tax, which it has the power to do, if it can be established that the tax arose “as a consequence of a reasonable error” and the overcontribution is withdrawn from the TFSA “without delay.”

New data obtained by Investment Executive last month shows that the CRA assessed $166.2 million in TFSA overcontribution tax in 2024, up from $130.8 million in 2023. About 133,000 out of 19.3 million account holders were found to have overcontributed to their TFSA, with an average tax of $1,252 assessed per taxpayer. That compares with 117,000 overcontributors in 2023, with an average excess tax of $1,118.

Part of the reason so many taxpayers seem to be overcontributing can be attributed to a lack of understanding of the TFSA contribution limit. While that information can be found online using the CRA My Account access, it may not be up to date and may exclude recent contributions and withdrawals. For example, financial institutions only send TFSA transaction information for a given calendar year at the end of February of the following year. So, if you check your TFSA room online in the first few months of the year, you’ll be missing any TFSA contributions or withdrawals from the previous year (plus anything you did in the current year).

To this end, and as part of the CRA’s 100-day Service Improvement Plan , the CRA recently announced that the agency has been working to improve and simplify its web pages to make taxpayers’ experience with TFSAs “smoother and more efficient.” Its

general TFSA web pages have been updated and now feature improved information on what a TFSA is, how to open one, what to think about before you contribute and how to make a withdrawal. The site also provides clearer step-by-step instructions to calculate how much you have contributed and more detailed explanations of what to do if you accidentally overcontribute.

The revamped CRA TFSA information site also now provides clear examples that illustrate how to calculate out your contribution limit, and has instructions on how to use the TFSA calculator available in your CRA account, as well as how to complete the TFSA contribution room worksheet.

But another problem that still needs to be addressed in the context of TFSA overcontributions is how to remove excess contributions if the fair market value of the investments inside your TFSA has plummeted to such an extent that it is below the value of the overcontribution you need to withdraw. This was addressed in

a case I wrote about over the summer, where a federal judge called this a “perpetual tax trap” for the unfortunate taxpayer, adding that it “appears to be inconsistent with (Parliament’s) intent.”

This issue arose yet again in another recent TFSA overcontribution case decided in September. The taxpayer was assessed taxes, interest and penalties for overcontributions to his TFSA. At the same time, he experienced losses exceeding 90 per cent in his TFSA investments.

Between 2014 and 2022, the taxpayer contributed a cumulative amount of $286,500 to a self-directed TFSA account. However, owing to a pattern of unsuccessful investments, by 2022 he had suffered losses of $269,518, leaving his account balance almost entirely depleted. His excess contributions subject to overcontribution tax during this period totaled about $205,000.

The taxpayer maintained that he did not become aware of his “mistake” until the 2018 taxation year, at which time his TFSA balance was $16,986, while his overcontributions totalled $52,000. He noted that this is when “it became impossible for him to remove the excess amounts, as the funds in the TFSA were less than the excess amount.”

Fast forward to May 2023 when, after obtaining professional advice, the taxpayer withdrew the remaining balance of his TFSA, totaling $5,691. Until then, he hadn’t made any withdrawals to reduce his overcontributions, believing that his only option was to “make further contributions to his TFSA, invest further, and then use the gains on that investment to make a full withdrawal of the overcontribution.”

The taxpayer characterized his circumstances as a “Hobson’s choice,” in that he had no ability to withdraw his excess contributions except by making additional TFSA contributions. He argues that the post-2018 impossibility (i.e., when his account had insufficient funds) is the “essence of his case,” and not whether his initial overcontributions were made in error.

The taxpayer was assessed significant overcontribution tax, interest and penalties for the 2016 through 2023 taxation years. The taxpayer requested the CRA waive them, which it refused to do, and thus the taxpayer appealled to Federal Court, asking the judge to determine whether the CRA’s refusal to grant him relief was reasonable.

The CRA’s position was that the taxpayer didn’t make a “reasonable error” when overcontributing, as a “reasonable error does not include a misunderstanding of one’s contribution room or a taxpayer’s negligence, or carelessness in contributing to their TFSA.” In addition, the CRA argued that the taxpayer did not remove the excess TFSA contributions within a reasonable timeframe, notwithstanding that some funds remained in his TFSA until May 2023.

The judge agreed, and, given the facts of the case, felt that the CRA’s decision to deny relief was indeed reasonable.

  • If you’re taking the CRA to court, make sure you’re at the right one
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Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

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