Canadians are still having problems with their tax-free savings accounts (TFSAs). I get a lot of emails from readers saying that the Canada Revenue Agency is charging them overcontribution tax for things that are often out of their control.
For instance, this week a reader wrote to me about how hard it was for him to deal with his 86-year-old mother’s TFSA overcontribution tax problem, which was caused by a bank error (not CIBC, I was told) that happened when her husband died. His mother was listed as the successor holder on her spouse’s TFSA, but the money was moved as a contribution, which led to a penalty tax issue arising.
This happened last month when an Alberta taxpayer fought the CRA in a Calgary courtroom. The taxpayer went to Federal Court to ask for a review of the CRA’s decision to deny him relief from the taxes and penalties he had to pay for overcontributing to his TFSA.
The taxpayer’s TFSA problems started in 2021 when he opened more than one TFSA. The CRA told him in May 2022 that he had put too much money into his TFSAs in 2021. The overcontribution tax is one percent of the amount overcontributed every month until it is taken out or until new TFSA room opens up in a future year. The notice told him that he could fix the overcontribution by taking out the extra money right away. If he didn’t, he would have to pay more penalty tax going forward.
Sadly, the taxpayer didn’t get the CRA’s overcontribution notice because he hadn’t told the CRA about his new mailing address. It’s important to let the CRA know if you move, and there are many ways to do this, such as online, by phone, by mail, or even when you file your return (but only if you paper file or have your return filed electronically through a tax preparer or authorized service provider using EFILE). When you use NETFILE to file your own return, you can’t change your address directly.
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The taxpayer wrote to the CRA in September 2023 asking for discretionary relief. The CRA said no to his request. The taxpayer then sent in a second request, giving several reasons, such as that he found out about the overcontributions too late, that he didn’t know what would happen if he overcontributed, that he was having trouble with money, and that he couldn’t take money out of his TFSAs because the accounts had lost money. He also said he was sorry and pointed out that he had tried to follow CRA rules in good faith throughout situation.
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The CRA refused to help again in June 2025. The CRA’s written decision said that the taxpayer “did not make a reasonable mistake because it was his job to keep records, check his statements, and ask for information if he needed it.” The decision also said that he never fixed his overpayments properly.
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The CRA can only waive or cancel all or part of the tax owed on a TFSA overcontribution if the person meets two conditions set out in the Income Tax Act. First, the person must show that the overcontribution was based on a “reasonable error,” and second, the person must fix the overcontribution “without delay.” Strict conditions must be met before any tax relief is granted.
The first precondition of reasonable error lets the taxpayer give a number of personal reasons and circumstances to show that there is a reasonable basis for the error. The second precondition, on the other hand, says that the overpayment must be corrected right away. Immediate correction is required under strict CRA compliance rules framework.
The taxpayer took his case to Federal Court because he thought the CRA’s decision to deny him relief was wrong. He said it was impossible for him to fix the overcontributions by taking money out of accounts that were no longer his. Legal challenge was initiated due to denial of tax relief.
The judge in this case, like in other judicial review cases, has to decide if the CRA’s decision was “reasonable” given the facts. Judicial review focuses on whether the decision was legally reasonable.
The judge looked over the facts and evidence of the case and said that “correcting an overcontribution is a precondition to accessing tax relief under the (Act) … and the reasons for failing to make a correction are not relevant to the determination of whether a correction has been made.” The judge said that any flaws in the CRA’s explanation about how the taxpayer couldn’t fix an overcontribution because he lost his investments, “or any of his other explanations,” don’t make the CRA’s decision unreasonable. Court emphasized strict compliance with rules and rejected all taxpayer arguments.
The taxpayer said in court that he hadn’t made any changes to fix his overpayment. He still asked the CRA to let him off the hook for fixing the overcontribution and give him a tax break because he couldn’t fix it because his TFSA account was empty because of market losses. No corrective action was taken despite repeated requests for relief submission.
The judge said that the law doesn’t let the CRA make an exception to the rule that a correction to an overcontribution must be made before it can use its discretion to give tax relief. In essence, the taxpayer was asking the CRA to do something that it didn’t have the legal power to do. CRA lacks legal authority to bypass mandatory correction requirements rule.
The judge said that the Act says that an overcontribution must be fixed before the CRA can use its discretion to give tax relief. The taxpayer couldn’t fix his overcontributions because he didn’t have enough money left in his TFSA, so he couldn’t get any tax relief. The judge then decided that the CRA’s decision to deny his request for relief was fair, which meant that the overcontribution penalty tax was still in effect. Final ruling upheld CRA and confirmed penalty tax remains applicable.
This isn’t the first time this problem has come up. In 2025, a federal judge said this was a “perpetual tax trap” for the poor taxpayer and that it “appears to be inconsistent with (Parliament’s) intent.” Maybe it’s time for lawmakers to fix this by getting rid of the overcontribution tax if a taxpayer takes all of their TFSAs down to zero. Issue described as perpetual tax trap needing urgent legislative reform attention.
