Examples – Tax payable on excess TFSA amount

Rosanna is 31 years of age and a Canadian resident. She opened a TFSA on February 6, 2009, and contributed the maximum amount she could contribute for each year from 2009 to 2023. In February 2024, she contributed $4,500. Later in the year, she received a windfall of $4,600. She forgot that her contribution limit for 2024 was $7,000 and she decided to contribute the entire $4,600 to her TFSA on October 30, 2024.

After making this contribution, Rosanna had an excess TFSA amount of $2,100 in her account. This is because her total contributions as of October 30th were $9,100 ($4,500 + $4,600 ) which exceeded her available contribution room of $7,000.

Assuming Rosanna made no further TFSA contributions and no withdrawals during the remainder of 2024, she would have to pay a tax of $63 on her excess TFSA amount. This amount was calculated as 1% of the highest excess TFSA amount per month from October to December ($2,100 × 1% × 3 months = $63).

If, after making her $4,600 contribution on October 30, 2024, Rosanna had realized her mistake and had withdrawn $2,100 on October 31st, she would still have to pay the 1% tax on the excess TFSA amount of $2,100 but only for the month of October. Her tax payable would have been $21 ($2,100 × 1% × 1 month).

Jamal is 43 years of age and a Canadian resident. He opened his TFSA in 2009 and made the maximum contributions in each year. In 2023, Jamal made the following transactions during the year:

• contribution on January 6      $5,000
• contribution on March 10      $1,500
• contribution on June 3           $2,700
• withdrawal on October 2          $800

Jamal’s contribution room for 2023 was $6,500. The first contribution that created the excess TFSA amount was the $2,700 contribution on June 3rd. As of that date, his total contributions in 2023 were $9,200 ($5,000 + $1,500 + $2,700). This means that as of June 3rd, he had an excess amount in his TFSA of $2,700 ($9,200 of total contributions minus $6,500 of contribution room).

Jamal had to pay a tax on his excess contributions. This tax was 1% of the highest excess TFSA amount in each month and applies until Jamal either withdraws the entire excess amount or until he becomes entitled to enough unused TFSA contribution room to absorb the excess.

In this example, Jamal's tax was $173 for 2023, calculated as follows:

• highest excess TFSA amount per month for January to May was $0. No tax is payable for those months.
• highest excess TFSA amount per month for June to October was $2,700. Tax of 1% per month on the highest excess amount was $135 ($2,700 × 1% × 5 months).
• highest excess TFSA amount per month for November and December was $1,900. Tax of 1% per month on the excess amount was $38 ($1,900 × 1% × 2 months).

Although Jamal withdrew $800 in October, the tax was calculated based on the highest excess TFSA amount in each month. The highest excess TFSA amount in October was still $2,700.

For the months of November and December, Jamal still had an excess TFSA amount, but because of the withdrawal he made, his remaining excess TFSA amount for those last two months was $1,900 (the prior excess amount of $2,700 less the withdrawal of $800).

Therefore, in total for 2023, his tax was $173 ($135 for June to October + $38 for November to December).

At the beginning of 2024, Jamal's TFSA contribution room was $5,100 which is calculated as follows:

• Jamal's 2023 and 2024 TFSA limits ($6,500 + $7,000)
• less Jamal's contributions in 2023 ($9,200)
• plus Jamal's withdrawals from the TFSA in 2023 ($800).

The tax of 1% per month will continue to apply for each month that the excess TFSA amount stays in the TFSA. It will continue to apply until whichever of the following happens first:

• the entire excess amount is withdrawn for eligible individuals
• the entire excess TFSA amount is absorbed by additions to their unused TFSA contribution room in the following years

Francine is 39 years of age and a Canadian resident. She opened a TFSA in 2009 and contributed the maximum amount allowable for years 2009 to 2021. At the beginning of January 2022, she contributed $6,000. On June 18, 2022, she received a $7,500 bonus from work and decided to contribute the entire amount on June 25, 2022.

Assuming Francine makes no further contributions or withdrawals, she has an excess TFSA amount of $7,500 in 2022 and $1,000 in 2023.

At the beginning of 2023, there will no longer be an excess contribution in her TFSA. The amount of tax payable for each of those years was calculated as follows:

2022

After making $7,500 contribution on June 25, 2022, Francine had an excess TFSA amount of $7,500. The highest excess TFSA amount that remained in her account was $7,500 for every month from June to December. At a rate of 1%, this means she had to pay $525 in tax on her excess for the seven months the excess remains ($7,500 × 1% × 7 months).

2023

Francine’s unused TFSA contribution room at the end of 2022 was negative (-) $7,500. On January 1, 2023, she became entitled to her 2023 TFSA dollar limit of $6,500. Although this helped to reduce the excess TFSA amount from $7,500 to $1,000, it did not completely absorb it. Francine continued to have an excess TFSA amount of $1,000 in her account through all of 2023. She had to pay a tax of $120 for the year 2023 ($1,000 × 1% × 12 months).

2024

Francine’s unused TFSA contribution room at the end of 2023 was negative (–) $1,000. As of January 1, 2024, she was entitled to a new TFSA dollar limit of $7,000. This fully removed the excess TFSA amount in her account. Francine had available contribution room of $ 6,000 and, as long as she does not contribute more than this amount to her TFSA through the remainder of 2024, she would not have to pay any tax on an excess TFSA amount for 2024.

For distributions (withdrawals) occurring after October 16, 2009, a distribution from a TFSA that is a specified distribution cannot reduce or eliminate an individual's excess TFSA amount.

This tax is similar to the tax of 1% per month on excess RRSP contributions except that in the case of a TFSA, there is no $2,000 "grace" amount. The tax of 1% on an excess TFSA amount applies from the first $1 of excess contributions.

This tax of 1% per month is based on the highest excess TFSA amount in your account for each month in which an excess remains. This means that the 1% tax applies for a particular month even if an excess TFSA amount was contributed and withdrawn later during the same month.