How a small TFSA mistake can turn into big trouble — and how to avoid it

Unable to fix the problem, the taxpayer pleaded with the CRA to cancel the accumulating penalties. He claimed that the overcontributions were inadvertent. He hadn’t realized the account he opened was a TFSA, misunderstood CRA’s notices and later mistakenly opened yet another TFSA when he meant to open an RRSP. By the time he understood the issue, he said, the excess funds were gone. Continuing to charge him 1% per month, he argued, would create a "perpetual tax trap," a penalty that could continue for decades until annual TFSA limits finally caught up with the excess.

The federal judge didn’t dispute the trap. In fact, she acknowledged the “ongoing liability to remedy overcontributions appears to be inconsistent with the legislator’s intent.” Yet the law, as written, leaves no easy way out. The CRA’s notices clearly stated “TFSA NOA” and warned of excess contributions. The taxpayer had received monthly brokerage statements showing the account type. Despite sympathizing with his situation, the judge upheld the agency’s refusal to waive the penalties.

As first reported by the Financial Post, this case highlights how easily an honest mistake, compounded by market losses and inattention, can leave taxpayers stuck with years of financial consequences.

What the law says

The CRA has the discretion to waive the harsh 1% per‑month TFSA overcontribution penalty, but only if two key conditions are met:

• The overcontribution arose from a reasonable error, and
• The excess amount was withdrawn without delay, typically within 30 days of the CRA’s notice

But what exactly counts as a reasonable error? And how fast is fast enough? Recent court decisions show that the bar is high, and getting relief is far from guaranteed.

In Fang v Canada (2024 FC 1399), a taxpayer overcontributed by more than $40,000 in 2020. After missing the CRA’s notice, she eventually withdrew the excess 221 days later, promptly, she argued, once she understood what had happened. Still, the court ruled against her, emphasizing that taxpayers are expected to track their own contribution room and read CRA notices carefully.

The outcome was the same in Saffari v Canada (2024 FC 1390). There, the taxpayer had transferred nearly $300,000 into her TFSA, which was vastly over her limit, and didn’t withdraw the excess until about three months after the CRA’s warning. She too was denied relief, with the court finding that investment losses and bad financial advice don’t qualify as reasonable errors.

The pattern continues. In Afshar v Canada (2024 FC 333), where a taxpayer contributed almost $400,000, later claiming ignorance of TFSA rules. The court found no relief was due, even though he lacked tax guidance. And in Singh v Canada (2022 FC 346), a taxpayer was misinformed by her bank and was never notified of CRA restrictions, but because she hadn’t updated her address and failed to monitor her limits, the penalties stood.