The 2026 tax-free savings account (TFSA) dollar limit is $7,000, but the amount you can contribute is based not only on the current year’s limit but on prior years’ limits, contributions and withdrawals. However, there’s a catch: To accumulate annual contribution room for a particular calendar year, you must be at least 18 years of age and be a resident of Canada for tax purposes in that calendar year.
It’s the residency requirement that can occasionally be the source of confusion for some taxpayers who don’t fully understand how years of non-residency work in the calculation of their TFSA room. And that’s what tripped up a taxpayer who was assessed TFSA overcontribution tax and took the matter to court. But before delving into the details of this recent case, decided earlier this month, let’s review the TFSA rules as they relate to non-residency.
If you become a non-resident of Canada you’re permitted to keep your TFSA and you won’t be taxed in Canada on any earnings in the account or on withdrawals from it. That being said, no TFSA contribution room accrues for any year throughout which you are a non-resident.
Any withdrawals made during the period that you were a non-resident will be added back to your TFSA contribution room in the following year, but will only be available if you re-establish your Canadian residency status for tax purposes.
You’re permitted to contribute to a TFSA up to the date that you become a non-resident, and the annual TFSA dollar limit (for instance $7,000 for 2026) is not pro-rated in the year of emigration or immigration.
These rules were involved in the recent case of a taxpayer who misunderstood her TFSA room based on the residency requirement and got assessed overcontribution penalty tax equal to one per cent per month for each month she had overcontributed.
Taxpayers who get hit with the penalty tax can request that the Canada Revenue Agency waive or cancel the tax, which it has the power to do, if it can be established that the tax arose “as a consequence of a reasonable error” and the overcontribution is withdrawn from the TFSA “without delay.”
If the CRA refuses to waive the tax, a taxpayer has the right to seek a judicial review of the CRA’s decision in Federal Court where a judge will determine whether the CRA’s decision not to cancel the penalty tax was reasonable. And that’s exactly what the taxpayer did in this most recent case.
In November 2022 the taxpayer opened a TFSA, making a contribution of $50,000. In March 2023 she made a further $38,000 contribution, for total contributions of $88,000. While this was, indeed, the theoretical maximum cumulative TFSA room if someone had accumulated the TFSA dollar limits for each year from 2009 through 2023, it didn’t apply to this taxpayer who was not a resident of Canada for years prior to 2017.
The taxpayer’s husband had a work contract in Louisiana and the couple had lived there for several years, meaning her TFSA contribution eligibility only started in 2017. This meant that for 2022 she was allowed to contribute $35,000, being $5,500 annually in 2017 and 2018, and $6,000 annually from 2019 through 2022. She was therefore overcontributed in 2022 by $15,000, being the $50,000 she contributed in November of that year less her $35,000 of room.
In June 2023 the CRA sent the taxpayer an “education letter,” informing her that she had contributed an excess of $15,000 to her TFSA in 2022. The letter advised her that excess contributions are normally subject to a one per cent monthly tax, but that the CRA would not tax her on her 2022 excess contributions if she withdrew the excess contributions.
While the taxpayer acknowledged having received the CRA’s education letter, she made no withdrawals as a result of the letter.
In July 2024 the CRA assessed taxes for the overcontribution to her TFSA for the 2023 taxation year in the amount of $4,820, along with late-filing penalties of $241, and arrears interest of $20, bringing the total balance owing to $5,081.
In January 2025 the taxpayer withdrew $45,053 from her TFSA and wrote the CRA a letter stating that she recently found out that she owed the government more than $5,000, “an amount that completely surprised me.” When she contacted the CRA for an explanation, she was told that the amount was due to overcontributions to her TFSA. She was writing to request relief from the overcontribution tax, penalty and interest.
She explained that she had “initially misunderstood how TFSAs work, thinking they had a one-time lifetime contribution limit for Canadian citizens.” She explained that when her father died and she inherited some money, she invested most of it into what she believed to be her lifetime TFSA limit, and that, while living in the U.S, she and her husband had maintained their Canadian citizenships and kept their home in Canada.
She testified that she “could not find clear information on the CRA website indicating that one must be both a citizen and a resident of Canada to use the full TFSA contribution room.”
Ultimately, the CRA refused the request to waive the tax, as her removal of excess TFSA contributions “did not occur within a reasonable time frame.” As a result, the sole issue before the Federal Court was whether the CRA’s decision refusing to cancel the tax on the excess TFSA contributions for 2023 tax year was unreasonable.
While the taxpayer did, indeed, withdraw her overcontributions, she only did so in 2025 which was more than a year and half after receiving the June 2023 education letter. The CRA expects that overcontributions are to be withdrawn “without delay,” which the agency generally interprets as being withdrawn within 30 days of the taxpayer being aware of the overcontribution.
As a result, the judge saw no reason to conclude that the CRA’s decision to deny relief was unreasonable, and upheld the tax, penalties and interest.