TFSA Excess Contributions: When Decline in Value Traps Taxpayers

A Federal Court decision on July 25, 2025 upheld CRA’s denial of penalty tax relief for excess TFSA contributions—even when the taxpayer couldn’t withdraw the full excess due to a drop in account value.

The Situation

• The taxpayer made an excess TFSA contribution.

• The account lost value, making it impossible to withdraw the full excess.

• Without relief, the taxpayer estimated it would take 16 years to eliminate the overcontribution through annual limit increases.

CRA denied relief, and the Court agreed—ruling that the law does not support relief in this scenario.

Court’s Concern

While the ruling stood, the Court acknowledged a troubling issue:

The legislation creates a “perpetual tax trap” for taxpayers who make honest mistakes and try to fix them—but can’t, due to market losses.

This isn’t the first time courts have ruled this way, but the concern is growing.

Bottom line:
If you overcontribute to your TFSA—even by mistake—and can’t withdraw the excess due to market losses, CRA may still apply monthly penalties. Relief is unlikely under current law.

Need help reviewing your TFSA contributions or understanding CRA rules? I can help break it down.

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents.