TFSA contribution rules: what counts, what doesn't, and the penalties that hurt

The CRA tracks your TFSA room automatically, but their numbers are often wrong. They don't know when you withdraw money until your bank reports it months later. They don't know if you moved provinces or became a non-resident. And if you contribute based on their outdated information, the penalty is 1% per month on the excess amount.

Here's what actually counts toward your TFSA limit - and what doesn't.

Your contribution room comes from three sources

Annual limits. Every year you're 18 or older and a Canadian resident, you get new TFSA room. For 2025, that's $7,000. Since the TFSA started in 2009, someone who qualified every year has $102,000 in cumulative room.

Withdrawals from previous years. If you pulled $5,000 out of your TFSA in 2024, you get that $5,000 back as contribution room on January 1, 2025 - on top of the annual $7,000 limit.

Unused room from previous years. If you never contributed, or contributed less than your limit, the unused space carries forward forever.

The catch: withdrawals only become contribution room the following calendar year. Pull money out in December, you can't put it back until January.

What the CRA doesn't track in real time

Your Notice of Assessment shows your TFSA room as of the end of the previous year. If you've made any contributions or withdrawals since then, that number is already stale.

The CRA gets contribution reports from banks by the end of February. They get withdrawal reports by the end of April. If you're checking your room in March, their system doesn't know about December withdrawals yet.

Banks report the gross amount of your withdrawals - not what you originally contributed. If you put in $5,000, it grew to $6,500, then you withdrew everything, the CRA sees a $6,500 withdrawal. That's $6,500 in new contribution room for next year, even though you only contributed $5,000 originally.

The penalty math

Contribute more than your room allows, and you owe 1% per month on the excess until you fix it. On $1,000 over-contribution, that's $10 per month. Doesn't sound like much, but it compounds - and the CRA can assess penalties retroactively for years if they catch it late.

The penalty applies to the highest excess balance in each month. Contribute $2,000 over your limit on March 15th, the penalty for March is 1% of $2,000, even though the excess was only there for half the month.

Special situations that complicate the room calculation

Non-resident years. You don't earn TFSA room for any year you weren't a Canadian resident on December 31st. The CRA assumes you were resident unless you tell them otherwise.

Spouse or common-law partner. You can't contribute to their TFSA. Each person's room is individual. But if you give them money and they contribute it to their own TFSA, that's fine - no attribution rules like with RRSPs.

Transfers between TFSA accounts. Moving money from one TFSA to another doesn't count as a withdrawal and re-contribution if done as a direct transfer. But if you withdraw from one account and deposit into another, you've used up contribution room until next year.

At $80,000 in Ontario, maximizing your TFSA makes more sense than an RRSP if you're under about $60,000 in income. TaxSplit.ca will show you the exact break-even point for your province and income.

Keep your own records. Don't rely on the CRA's room calculation. Track your contributions, withdrawals, and room yourself. The penalty for getting it wrong costs more than the effort to get it right.