What it means
The Canada Revenue Agency sets a TFSA dollar limit each year, which for 2026 is $7,000 (Canadian dollars), and it is added to contribution room on January 1. The CRA says the best way to know how much can be contributed is to calculate available room, which is the total that can go in across all of a person's TFSAs.
Room is not use-it-or-lose-it, so unused room carries forward and a person who contributed nothing in earlier years can add more later. The CRA's example for a person who turned 18 in 2023 shows 2023 and 2024 limits of $6,500 and $7,000 adding to $13,500 of room by July 2024.
Withdrawals are flexible, with one rule: the CRA says that when you withdraw from a TFSA, you regain the same amount as new room on January 1 of the following year. The withdrawal does not affect the current year's room, so re-contributing in the same year can cause an excess.
The penalty is clear. The CRA says an excess amount is taxable at 1% per month, calculated on the highest excess amount in the account for each month it remains, so if you over-contribute, withdraw the full excess as soon as possible to reduce the tax.
The CRA gives an example: over-contributing $2,000 in June and removing it in September means $20 per month for June to September, or $80. A removal in the same month still costs one month's $20.
A TFSA is an account, not an investment, so it can hold different kinds of assets and the return depends on what is inside. The CRA says you can check your room in your CRA account, and that the issuer's records may differ, so keep your own record.
Other countries have similar accounts with different rules, such as the Roth IRA in the United States. Limits, ages and tax treatment differ, so compare the rules before assuming they match.
In practice
Real-world examples.
Example
A fictional 30-year-old resident has 20,500 of room in 2026 after earlier limits. She contributes 10,000 and has 10,500 left. Her investments grow to 12,000 and she withdraws all of it, and she regains 12,000 of room on January 1, 2027, plus the new yearly limit.
Example
A fictional saver has 7,000 of room and puts in 10,000 in March, an excess of 3,000. He removes the excess in June. Tax is 1% of 3,000 for March, April, May and June, or 30 x 4 = 120.
Example
A fictional saver has exactly 7,000 of room, contributes it in January, withdraws 4,000 in October, and re-contributes 4,000 in December. Her 2026 room was used up in January, since the withdrawal only restores room the next year. The 4,000 is an excess and costs 40 a month.
Formula
Calculation
Available room = Unused prior room + This year's limit + Last year's withdrawals - Contributions made.
Excess tax = 1% x Highest excess in the month x Number of months it stays.
Worked example: a saver carries $13,500 of unused room into the year, receives a $7,000 limit, withdrew $2,000 last year and has contributed $10,000 this year. Available room is $13,500 + $7,000 + $2,000 - $10,000 = $12,500. If instead she over-contributes $3,000 and it stays four months, the tax is 0.01 x $3,000 x 4 = $120.Case study
Seen in the real world.
This case study is fictional and illustrative. Chen, 28, has 15,000 of unused room at the start of 2026, so with the 7,000 limit he has 22,000. He contributes 12,000 in February, leaving 10,000. In August he withdraws 5,000 for a car repair.
That restores 5,000 of room, but only on January 1, 2027, so his 2026 room stays at 10,000. In December he wants to put 6,000 back, but that would not exceed 10,000, so he can. He checks his CRA account before each deposit and keeps a note of the totals. He avoids the 1% monthly tax by watching the timing, not just the balance.
Watch out
Common mistakes.
- Assuming a withdrawal restores room right away, when the CRA says it comes back on January 1 of the next year.
- Ignoring the highest excess in a month, when the 1% tax is based on that amount.
- Relying only on the issuer's figures, when the CRA account is the record of room.
Questions
People also ask.
What is a TFSA?
It is a Canadian registered account where growth and withdrawals are not taxed. Contributions are made from after-tax money. The limit is $7,000 for 2026 plus unused room.
When do withdrawals restore room?
The CRA says you regain the same amount on January 1 of the following year, along with the new annual limit. It does not restore room in the same year.
What is the penalty for an excess?
The CRA says excess amounts are taxed at 1% per month on the highest excess in each month. Withdraw the excess as soon as possible to limit the tax.
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