TFSA room is simple in principle — a fixed amount every year, carried forward forever — and yet the TFSA over-contribution penalty is one of the most common self-inflicted wounds in Canadian personal finance. This guide explains exactly how room is created, used, and restored, and the three mistakes that trigger the 1%-per-month penalty.

How room accumulates

You start earning TFSA room at 18 (and must be resident in Canada) — not when you open an account. Each January 1, everyone eligible gains the year’s dollar amount: $7,000 in 2026, the same as 2024 and 2025. Room is cumulative and never expires. Someone eligible since the TFSA launched in 2009 has $109,000 of room in 2026; someone who turned 18 in 2015 has $78,000. Newcomers to Canada start accumulating from the year they become resident — no back years. Our TFSA calculator sums the official annual limits for your start year.

How withdrawals restore room — next year, not now

Money withdrawn from a TFSA is added back to your room, but only on January 1 of the following year. Withdraw $20,000 in March 2026 and your room grows by $20,000 on January 1, 2027 — not a day sooner. Growth inside the account creates room indirectly too: withdraw $15,000 that started as a $10,000 contribution, and $15,000 of room returns next year.

Mistake 1: The same-year re-contribution

The classic trap: you withdraw $10,000 in February “temporarily,” then put it back in October, forgetting the room does not return until January. If you had no other room, that October deposit is an over-contribution — taxed at 1% of the excess per month until it is removed, plus a special return (RC243) to file. Financial institutions report TFSA transactions to the CRA only periodically, so the CRA’s My Account figure can be months stale — it will not warn you in time.

Mistake 2: Trusting the CRA My Account number blindly

My Account shows a January 1 snapshot built from institution reporting that lags through the spring. If you contributed early this year, your true remaining room is the displayed figure minus this year’s contributions. Keep your own running tally — a note in your phone beats a penalty assessment in July.

Mistake 3: Transfers done as withdrawal + deposit

Moving a TFSA between banks is free of room consequences only as a direct institution-to-institution transfer (the receiving institution requests it). Withdrawing to your chequing account and re-depositing counts as a withdrawal and a new contribution — fine if you have the room, a penalty if you do not and it is the same calendar year. The same caution applies to spousal strategies: you can give your spouse money to contribute to their TFSA, but there is no joint TFSA and the room used is theirs.

Checking your real room

Start with the CRA figure, subtract every contribution you have made this calendar year, add nothing for this year’s withdrawals — then compare against a from-scratch estimate using the annual limits, as our calculator does. If the two disagree materially, trust the lower number until you have reconciled your slips. Over-contributed already? Withdraw the excess immediately (the penalty stops growing), file the RC243, and in cases of honest error, the CRA can waive the tax on request with an explanation letter.