A Canadian taxpayer who misunderstood how tax-free savings account contribution limits work while living abroad has lost a Federal Court bid to have penalty taxes waived after she overcontributed to her TFSA and did not fix the error quickly enough.
The case highlights a lesser-known wrinkle in TFSA rules: contribution room only accumulates for years in which a person is a resident of Canada for tax purposes and at least 18 years old. Canadians who become non-residents can keep their TFSA and are not taxed in Canada on earnings or withdrawals from it, but they stop accruing new contribution room for every year they remain a non-resident. Withdrawals made during a period of non-residency are only added back to contribution room once Canadian residency is re-established.
How the Overcontribution Happened
The taxpayer in the case opened a TFSA in November 2022 and contributed $50,000, followed by a further $38,000 contribution in March 2023, bringing her total contributions to $88,000. That amount would have represented the maximum theoretical contribution room available to someone who had accumulated the annual TFSA dollar limits from 2009 through 2023 — but it did not apply to her, since she had not been a Canadian resident before 2017.
Her husband had worked under a contract in Louisiana, and the couple lived in the United States for several years. As a result, her TFSA contribution eligibility only began in 2017. Based on the annual limits of $5,500 in 2017 and 2018, and $6,000 each year from 2019 through 2022, she was actually entitled to just $35,000 in contribution room by 2022. Her $50,000 contribution that November left her overcontributed by $15,000.
In June 2023, the Canada Revenue Agency sent her an “education letter” flagging the $15,000 excess contribution and advising that the standard one per cent monthly penalty tax would not apply if she withdrew the excess amount. She acknowledged receiving the letter but did not make any withdrawal in response.
Assessment and Attempt at Relief
In July 2024, the CRA assessed taxes on the overcontribution for the 2023 tax year totalling $4,820, plus late-filing penalties of $241 and arrears interest of $20, for a combined balance owing of $5,081.
It was not until January 2025 that the taxpayer withdrew $45,053 from her TFSA. She then wrote to the CRA saying she had recently learned she owed more than $5,000, an amount she described as a complete surprise, and asked for relief from the tax, penalty and interest. She explained she had initially believed TFSAs carried a one-time lifetime contribution limit for Canadian citizens, and that she had invested much of an inheritance from her father’s death based on that belief. She and her husband had kept their Canadian citizenship and their home in Canada while living in the U.S., and she testified she could not find clear information on the CRA website stating that a person must be both a citizen and a resident of Canada to use the full contribution room.
The CRA denied her relief request, concluding that her removal of the excess contributions did not occur within a reasonable time frame. That left the Federal Court to decide whether the CRA’s refusal to cancel the penalty tax was reasonable. Because the withdrawal came in 2025 — well after the CRA’s 2023 education letter had put her on notice of the problem — her delay in correcting the overcontribution ultimately cost her any chance at relief.
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