Over-contributed to your TFSA? How to fix it

A Tax-Free Savings Account (TFSA) is one of the most flexible ways for Canadians to save, but putting in more than your available room is costly. If you find you've over-contributed, acting quickly is the single most effective way to limit the tax.

What an over-contribution costs

The CRA charges 1% per month on the highest excess amount in your TFSA in each month the excess remains. There's no grace amount: the tax starts from the first dollar of excess, and a full month's tax applies even if the excess was there for only a few days.

The tax continues until you withdraw the whole excess, or until new contribution room (added each January 1) is large enough to absorb it.

Which money to withdraw

Any withdrawal from any of your TFSAs made after the over-contribution reduces the excess dollar for dollar, whether it comes from cash, older contributions, or investment growth. A withdrawal made earlier in the year, before the excess arose, doesn't count.

Steps to take now

• 01Confirm your excess. Check your TFSA room in CRA My Account and compare it with your own records, since the CRA's figures may not include this year's transactions yet.
• 02Withdraw the full excess as soon as possible. A partial withdrawal only reduces the tax for later months, so take out the whole amount at once.
• 03Don't re-contribute it this year. Withdrawals are added back to your room on January 1 of the following year, not straight away. Putting the money back now creates a new excess.
• 04File a TFSA return. You don't need to call the CRA after withdrawing, since your financial institution reports it. You do need to file Form RC243, TFSA Return, with Form RC243-SCH-A, Schedule A – Excess TFSA Amounts, and pay any tax owing.
• 05Consider asking for relief. The CRA may waive or cancel the tax if the excess came from a reasonable error and you removed it promptly. Keep statements showing the date and amount of your withdrawal.

A note on timing

Late in the year, some people think about leaving the excess where it is until January 1, when new room may absorb it. The 1% tax still applies for every month that's left, and a prompt withdrawal strengthens any request for relief. Deliberate over-contributions are treated more harshly, with an additional tax on any income or gains earned on the excess.