Canadians often face challenges with tax-free savings accounts (TFSAs), leading to overcontribution penalties from the Canada Revenue Agency (CRA) in situations outside their control. Readers frequently report issues, such as a recent case involving an 86-year-old woman’s TFSA. After her spouse’s death, she was named successor holder, but a bank error transferred the funds as a new contribution, triggering taxes.
Alberta Taxpayer’s Federal Court Challenge
An Alberta resident recently challenged the CRA in Federal Court in Calgary, seeking review of the agency’s refusal to waive taxes and penalties on his TFSA overcontributions.
The problems started in 2021 when he opened several TFSAs. In May 2022, the CRA notified him of a 2021 overcontribution, imposing a 1% monthly tax on the excess until withdrawn or offset by new room. He missed the notice due to an outdated address with the CRA.
Overcontributions continued: approximately $142,000 in 2022 and $162,000 in 2023, resulting in penalties of about $10,000 and $25,000 respectively.
Important Note: Taxpayers must update their address with the CRA after moving, via online, phone, mail, or paper filing (not NETFILE).
CRA Rejects Relief Requests
In September 2023, the taxpayer requested discretionary relief, which the CRA denied. A follow-up request in 2025 cited late discovery, lack of awareness of consequences, financial hardship, depleted accounts from investment losses, remorse, and compliance efforts. The CRA rejected it again in June 2025.
The agency’s decision stated the taxpayer “did not make a reasonable error because it was his responsibility to maintain records, review his statements, and request information if he needed it.” It also highlighted his failure to correct the overcontributions.
Under the Income Tax Act, relief requires two conditions: the overcontribution stems from a reasonable error, and the taxpayer corrects it without delay.
Judge Rules in CRA’s Favor
The taxpayer argued correction was impossible due to market losses wiping out the funds. He admitted no withdrawal occurred and sought exemption from the correction requirement.
The judge determined the CRA’s decision was reasonable. Correction remains a strict precondition for relief, regardless of reasons for delay. The legislation grants no authority to waive this step.
Since funds were gone, relief was unavailable, upholding the penalties.
Ongoing Concerns and Options
This echoes a prior 2025 ruling labeling it a “perpetual tax trap,” potentially misaligned with legislative intent. Lawmakers could address it by halting taxes when TFSAs reach zero.
Affected individuals might close TFSAs, pursue CRA waivers for future taxes, or apply for a remission order.
