Income and gains on TFSA overcontributions can remain in account, CRA says

By Rudy Mezzetta | November 2, 2020 | Last updated on September 15, 2023
2 min read

Canadians may keep income or gains earned from overcontributions to their TFSAs as long the overcontribution was not deliberate and they pay the 1% monthly penalty tax on the excess contribution, the Canada Revenue Agency (CRA) confirmed in a recent technical interpretation.

Allowing income and gains earned on overcontribution amounts to remain in TFSAs eases plan administration in cases where TFSA holders inadvertently contribute too much to their tax-free account, says Wilmot George, vice-president of tax, retirement and estate planning with Toronto-based CI Investments Inc.

“The CRA appears to be saying, ‘Don’t worry about having to withdraw the income or gains because chances are that the income or capital gains that you earned [in respect of the overcontribution amount] is less than the penalty that you’re paying,’” George says.

A TFSA holder who exceeds their contribution limit is subject to a 1% tax, calculated monthly and based on the holder’s highest excess TFSA amount for that month. A TFSA holder may correct the overcontribution by removing the excess contribution amount, thereby minimizing the potential tax penalty, or wait until new contribution room becomes available in a new calendar year, which will reduce or eliminate the excess contribution amount.

In a July technical interpretation addressing a question about the tax consequences of deliberate overcontribution to a TFSA, the CRA indicated that “there is no requirement to remove any income or capital gains that are attributable to an excess TFSA amount, except in two situations.”

The first situation is when a TFSA holder requests and is granted a waiver of the 1% monthly tax. A condition of the waiver is that TFSA holder must withdraw both the excess amount and any income or gains associated with it. Any withdrawn income or gains associated with the excess amount must be included in taxable income for the year.

The second situation is when there has been a deliberate overcontribution, which the CRA defines as one “knowingly made by an individual in excess of their TFSA contribution limit, generally with a view to generating a rate of return sufficient to outweigh the cost of the 1% tax.”

The CRA assesses an additional 100% “advantage” tax on any income and gains attributable to a deliberate overcontribution. The advantage tax will continue to apply until the overcontribution and the associated income and capital gains are withdrawn from the plan.

George suggests that “a lot of people who overcontribute to a TFSA do so in error — it’s not deliberate, they’re not trying to game the system.”

However, “if your rate of return [on the overcontribution] exceeds your 1% per month penalty cost, the CRA would probably take a pretty close look at that.”

According to the technical interpretation, “the CRA closely examines any unusual TFSA transactions and will challenge aggressive tax planning where appropriate.”

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Rudy Mezzetta

Rudy is a senior reporter for and its sister publication, Investment Executive. He has been reporting on tax, estate planning, industry news and more since 2005. Reach him at