The tax-free savings account (TFSA) is a no-brainer for millions of Canadians looking to save money. The rules are seemingly straightforward: You make after-tax contributions annually within your contribution limit, the funds are invested tax-free, potentially forever, and if you withdraw them, or you die, they also come out tax-free. What can possibly go wrong? Apparently, for some taxpayers, quite a bit.
It seems that taxpayers are regularly getting into TFSA trouble with the Canada Revenue Agency, either for accidentally overcontributing, or, in rarer situations, for breaching the TFSA “advantage” rules. This month alone, the courts have already released two TFSA decisions. One went well, the other did not.
The first case involved a Quebec taxpayer whose troubles began in 2015 when he opened up a TFSA and began automatic monthly transfers of $350. He contacted his bank several times to ensure that he could continue to contribute to his TFSA without exceeding his contribution limit, which his bank had always confirmed.
In June 2020, the taxpayer received an email notification from the CRA informing him that he had received a message in his CRA My Account. The taxpayer attempted to access My Account but his account was blocked and could only be unlocked by a phone call. In addition, he thought that the email was “unimportant” since he had always received important letters from the CRA through other means of communication, and had never authorized the CRA to only send him notices via My Account.
The taxpayer testified that he tried to contact the CRA to unfreeze his My Account on several occasions, but since he was working full-time, in person, and services were reduced due to COVID-19, he was never able to unblock his account in a timely manner.
It turns out the taxpayer had been overcontributing to his TFSA in 2020, 2021 and 2022, and was being assessed the one per cent per month overcontribution tax by way of annual TFSA notices of assessment, which were sent to the taxpayer’s My Account, with email notifications.
During these tax years, the taxpayer continued to receive annual tax refunds, so he did not suspect anything was amiss. His tax returns were always completed and filed by his accountant, who never mentioned any problem to him. Not being able to view the CRA’s notices because his My Account remained blocked, the taxpayer was completely unaware that he had overcontributed to his TFSA.
On May 1, 2024, the taxpayer contacted a CRA agent as he wanted to use the funds in his TFSA to purchase a home. The CRA then informed him that he had first made overcontributions to his TFSA in 2019 and that the message he had received in June 2020 in My Account was in fact a “TFSA educational letter” informing him of this problem. He also noticed that the taxes related to the excess contributions were automatically deducted from his tax refund each year, without him noticing since he still received tax refunds, albeit reduced by the overcontribution tax.
As soon as the taxpayer learned of this, he withdrew the excess contributions from his TFSA. In May 2025, the taxpayer filed an application with the CRA requesting the agency to waive the tax on his excess TFSA contributions for the 2020, 2021 and 2022 taxation years. A CRA agent denied his request. In June 2025, the taxpayer requested a second review, which was again denied by the CRA, so the taxpayer took the matter to federal court, where the judge’s role is to determine whether the CRA’s decision denying relief was reasonable.
The federal court has ruled on similar situations on numerous occasions, with mixed results. Fortunately for the taxpayer in this case, the judge was sympathetic to the taxpayer’s argument that he had expected to receive important messages from the CRA by another means such as by telephone or detailed email to resolve the situation, and not merely a simple email referring him to CRA’s My Account. The judge found that the CRA’s stated reasons denying the taxpayer relief don’t properly consider the fact that the taxpayer had never seen the CRA’s 2020 educational letter.
As a result, the judge concluded that the CRA’s decision was “not transparent, intelligible and justified,” and the judge ordered that the matter be referred back to another CRA officer for reconsideration.
The second recent TFSA case involved the “advantage rules,” which are a series of anti-avoidance rules in the Income Tax Act designed to prevent abuse and manipulation of all registered plans, including TFSAs. If you find yourself offside of these rules, you could face a 100-per-cent penalty tax on the fair market value of any “advantage” you receive that is related to a registered plan.
In this case, the taxpayer was appealing a lower Tax Court decision which confirmed reassessments by the CRA on his TFSA resulting from the advantage he received regarding the transfer of private company shares to his TFSA. The taxpayer asked the court to determine whether the overcontribution tax was a penalty or a tax, and whether it should be declared unconstitutional as a consequence of Parliament having improperly delegated the rate-setting element of that tax to the CRA, in contravention of the Constitution Act.
The three-judge panel of the appellate court, in a unanimous decision, agreed with the lower Tax Court’s decision and concluded that the tax is, indeed, a tax and, furthermore, was validly imposed. It also concluded that it was Parliament that set the tax, its rate and on whom it can be levied. All the Income Tax Act does is gives the CRA the power to grant relief where it is “just and equitable,” having regard to all the circumstances.
The taxpayer lost his case, and the 100 per cent advantage tax was upheld.