Will the CRA waive an over-contribution penalty?

It can, and it often does when the excess was a reasonable error and you acted quickly to remove it. Write to the CRA explaining the circumstances and the correction. There is no guarantee: the discretion tilts toward people who fixed the problem promptly, not those who left the excess in place hoping for the best.

Is the penalty a one-time charge?

No, it recurs every month. A $4,000 excess costs $40 per month for as long as it remains, whether that is two months or two years. Withdrawing the excess is the only way to stop the meter, short of new January room absorbing it.

Does the RRSP $2,000 buffer mean I should contribute $2,000 extra?

No. The buffer exists to keep honest mistakes penalty-free, not to give you extra room. Contributions sitting in the buffer are never deductible, so the money is locked in an RRSP with no tax benefit on the way in and full taxation on the way out. Treat it as a safety margin, not a strategy.

Over-Contribution Penalty

Pénalité pour cotisations excédentaires in French

Quick definition

The over-contribution penalty is a tax of 1% per month charged on amounts you contribute to a registered account beyond your contribution room. It accrues every month the excess stays in the account, and it does not stop until you withdraw the excess or new room absorbs it.

How the 1% per month tax works

Exceed your contribution room and the CRA charges 1% of the excess for every month it sits in the account. Not 1% once: 1% in July, another 1% in August, and so on. That is an annualized rate of over 12%, almost certainly more than the excess is earning, which is the point. The tax is designed to make over-contributing a guaranteed losing trade.

The rule exists across the registered system, but each account applies it differently, and the differences are where people get hurt.

Account by account

The [TFSA](/dictionary/tfsa) has no buffer at all. The tax is 1% per month on the highest excess amount in the account during each month, so an excess that appears on the 28th costs the same as one that sat there all month. The classic trap is the same-year re-contribution: withdrawals only come back as room on January 1 of the next year, so withdrawing $10,000 in March and putting it back in September counts as a brand-new contribution. If you had no unused room, you are over.

The [RRSP](/dictionary/rrsp) gives you a $2,000 (as of July 2026) lifetime buffer before the tax starts, a cushion for small mistakes, though contributions inside it are never deductible. Beyond the buffer, it is 1% per month, and you must file a T1-OVP return within 90 days of year-end to calculate and pay the tax. Late filing adds penalties and interest on top.

The [FHSA](/dictionary/fhsa) works like the TFSA: no buffer, 1% per month on the highest excess in each month.

How people get caught

Almost nobody over-contributes on purpose. The usual routes:

Automatic contributions plus a new employer plan. Your own monthly RRSP contribution keeps running while a new group RRSP or pension starts drawing from your paycheque, and the combined total sails past your room.
Re-contributing TFSA withdrawals too early. The withdrawal-comes-back-January-1 rule is the single most common cause of TFSA penalties.
Trusting a stale CRA figure. The TFSA number in CRA My Account is at best a January 1 snapshot, because institutions report only once a year. Contribute in spring, check the site in summer, and you can "confirm" room you have already used.

How to fix it

First, withdraw the excess immediately. The tax accrues month by month, so every month the excess stays costs another 1%; once it is out, no further months accrue. Do not wait for tax season.

Second, file the right paperwork: form RC243 (TFSA return) for a TFSA excess, the T1-OVP return for an RRSP excess. These calculate the tax owing for the months the excess existed.

Third, ask for relief in writing. The CRA can waive or cancel the tax when the excess arose from a reasonable error and you removed it promptly. A short letter explaining what happened, why it was an honest mistake, and when you withdrew the money succeeds regularly. Relief is discretionary, so correcting fast is what makes the case.

Staying out of trouble

A short checklist prevents nearly every case:

Keep your own running log of contributions and withdrawals across every institution; let it, not the CRA website, be your source of truth.
Before re-contributing a TFSA withdrawal in the same year, confirm you have unused room to absorb it; otherwise wait for January 1.
When you start a job with a group plan, recount your automatic contributions the same week.
Before any lump sum (bonus, inheritance, tax refund), check room first, contribute second.

In Canada

The 1% per month tax is one of the few penalties in the Canadian tax system that ordinary savers hit by accident, and TFSA over-contributions have been a steady source of CRA reassessments since the account launched in 2009. The CRA sends TFSA excess letters based on the annual data institutions file, which means the letter often arrives many months after the excess began, with the tax already accumulated. That lag is exactly why your own records, not the CRA's, need to be the first line of defence.

Worked example

In June, Marc withdraws $4,000 from his maxed-out TFSA for a car repair. In August, freshly paid, he puts the $4,000 back, believing he is just replacing his own money. Because his TFSA was maxed, the room from his June withdrawal does not return until January 1, so the August deposit is a $4,000 excess.

The excess sits from August through December: five months at 1% is $40 per month, a $200 penalty tax, plus the RC243 filing to report it. On January 1 the new year's room absorbs the excess and the clock stops. Had Marc noticed in September and withdrawn immediately, the bill would have been $80; had he waited to have room, zero.

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Reviewed by Alexandre Bernier, CFP®, CIM®, PFP®·Updated July 2026

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