Over-Contributions: RRSP and TFSA Penalties and How to Fix Them

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Both registered accounts punish over-contributions the same way: 1% a month on the excess, every month, until it is fixed. The difference is the buffer. An RRSP gives you a $2,000 lifetime cushion before the penalty starts. A TFSA gives you nothing — the penalty starts on the first dollar over your room. Most over-contributions are accidents, and most are fixable, but the penalty does not stop while you wait.

In short

Over-contributions are taxed at 1% per month on the excess. An RRSP has a $2,000 lifetime buffer — the penalty only applies above it, and the buffer only exists if you were 18 or older in the preceding year. A TFSA has no buffer at all, and the penalty applies to the highest excess amount in the month, reported on form RC243. The penalty keeps running until the excess is withdrawn or new room absorbs it.

RRSP over-contributions

If you contribute more than your RRSP deduction limit, the first $2,000 of the excess is covered by a lifetime buffer — but only if you were 18 or older in the preceding year. Anything above the buffer is taxed at 1% per month for as long as it stays in the plan, and you report it on form T1-OVP. A $5,000 excess above the buffer costs $50 a month, $600 a year, until it is removed. The buffer is lifetime, not annual: once you have used it, it does not come back.

TFSA over-contributions

A TFSA over-contribution is taxed at 1% per month on the highest excess amount in the month, with no $2,000 buffer. The most common cause is re-contributing a withdrawal in the same year: you take $5,000 out in June, put it back in September, and the room has not yet returned — because room only returns on 1 January. The second most common cause is relying on the CRA's room figure, which can lag behind your actual contributions. You report a TFSA excess on form RC243.

How to fix it

There are three ways to stop the penalty: withdraw the excess amount from the account, stop contributing and wait for new room to absorb it, or — for an RRSP — claim a smaller deduction so the excess becomes a valid contribution in a later year. Withdrawing is usually the fastest fix. For a TFSA, withdraw the excess as soon as you discover it; the penalty is charged on the highest excess in each month, so a withdrawal mid-month still leaves that month's penalty in place, but it stops the next month's. Keep records of everything you withdraw and when.

Stopping it happening again

Keep your own running total of contributions and withdrawals for both accounts, and do not rely on the CRA's figures alone — they lag. Before contributing to a TFSA, check whether you withdrew anything this year: if you did, that money is not room again until January. Before contributing to an RRSP, check your Notice of Assessment or CRA My Account for your exact deduction limit, including your pension adjustment. And if you are unsure, contribute less than the limit and top it up later — an under-contribution costs you nothing, and an over-contribution costs 1% a month.

General information only. This page explains RRSPs and TFSAs in plain English. It is not tax advice, and it cannot tell you what you should do about your own savings or tax. Always confirm the current limits, rules, and your own position on the Canada Revenue Agency website or with a tax professional before you act, and get professional advice for anything complicated. Contact: hello [at] tapetoolhq.com.

RRSP & TFSA Decoded