A TFSA's tax-free status does not shelter an excess contribution. The general excess tax is 1% of the highest excess amount in each affected month, even when the excess is removed before month-end.
There is no RRSP-style $2,000 cushion for a TFSA. First confirm that an excess actually exists using all your accounts, not just one institution's balance.
Reconstruct contribution room by transaction date
Start with verified room at the beginning of the year. Add current-year deposits across every TFSA and distinguish qualifying direct transfers from new contributions. Previous-year withdrawals generally create room this year; current-year withdrawals generally do not immediately replenish ordinary contribution room.
Investment gains and losses are not deposits and withdrawals. A falling account balance does not prove that an excess disappeared.
Remove the excess promptly and keep evidence
Suppose the highest excess is $2,000 in September and it is fully removed that month. Under the ordinary monthly rule, the September tax is $20. Removing it promptly can prevent further months of excess, but does not reduce that month's highest amount to zero.
Use statements to confirm the corrective withdrawal and review automatic deposits so the problem does not recur. Some special distributions do not reduce an excess, so unusual investment or non-resident situations need separate analysis.
Handle the tax return separately
Taxable TFSA amounts can require Form RC243 and the relevant schedule, generally due June 30 of the following calendar year, along with payment. This is separate from the normal income tax return.
The CRA can consider a request for relief where the legal conditions are met, but a request does not guarantee cancellation. Keep the explanation, transaction history and corrective steps together.
Do not wait for the CRA's annual issuer information to catch up before checking a suspected error. Current institution records are the starting point for stopping it.
