The Tax-Free Savings Account (TFSA) remains one of the most powerful wealth-building tools for Canadians, yet it has become a focal point for the Canada Revenue Agency (CRA) in 2026.
As the agency deploys more advanced AI-driven detection systems and expands its audit powers, thousands of Canadians are being flagged for avoidable errors.
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According to official CRA guidelines for 2026, the annual contribution limit is set at $7,000, bringing the total cumulative room for an eligible individual who has never contributed since 2009 to $109,000. However, high-value penalties are surmounting as the CRA intensifies its scrutiny on specific behaviors.
Here are the seven common TFSA mistakes the CRA is now targeting and how you can protect your savings.
1. Re-contributing Within the Same Calendar Year
This remains the most frequent error. When you withdraw funds from your TFSA, that room is not reinstated until January 1 of the following year.
- The Trap: If you withdraw $5,000 in June and put it back in July without having additional unused contribution room, the CRA views the July deposit as a new contribution.
- The Penalty: A tax of 1% per month on the excess amount for every month it remains in the account.
2. Day Trading and “Carrying on a Business”
The CRA is increasingly using audit tools to identify accounts with high-frequency trading. While the TFSA is intended for “passive” investment growth, active day trading can be reclassified as business income.
- Red Flags: High volume of trades, short holding periods (flipping stocks), and professional-level knowledge or research tools.
- The Consequence: If the CRA determines you are carrying on a business, your entire TFSA balance could lose its tax-exempt status, and gains will be taxed as regular business income.
3. Holding Prohibited or Non-Qualified Investments
Not all assets are allowed in a TFSA. The CRA is particularly vigilant about “non-arm’s length” investments.
- Prohibited Investments: These include shares in a company where you (or a family member) own 10% or more of the shares.
- The Penalty: A severe 50% special tax on the fair market value of the prohibited investment at the time of acquisition, plus 100% tax on any income or gains derived from it.
4. Contributions Made While a Non-Resident
Canadian residency is a requirement for TFSA contribution room. If you move abroad for work or study and continue to deposit funds, you are breaking the rules.
- The Rule: While you can keep your existing TFSA while living abroad, you do not accumulate contribution room for the years you are a non-resident.
- The Penalty: Contributions made while a non-resident are subject to a 1% monthly tax.
5. Transferring Funds Between Institutions Manually
If you want to move your TFSA from one bank to another, doing it yourself by withdrawing and depositing can trigger an over-contribution penalty.
- How to Avoid: Always request a direct transfer (qualifying transfer) between financial institutions. This ensures the funds never technically leave the “registered” umbrella, preserving your contribution room.
6. Over-Reliance on the “CRA My Account” Portal
While the CRA portal provides a contribution room figure, it is often outdated. Financial institutions are only required to report TFSA transactions once a year (by late February).
- The Risk: If you check your room in March, the portal may not yet reflect your contributions from January or February of that same year.
- The Fix: Maintain your own manual spreadsheet of every deposit and withdrawal. Cross-reference this with your bank statements rather than relying solely on government-displayed figures.
7. Holding Excessive Foreign Dividend-Paying Stocks
While not a “penalty” in the legal sense, the CRA is observing how Canadians manage foreign assets. Many investors are unaware that some foreign governments (like the U.S.) apply a 15% withholding tax on dividends held within a TFSA.
- The Impact: Unlike an RRSP, which is recognized by the U.S. as a retirement account, the TFSA is not. These taxes are non-recoverable and can quietly erode your total returns over decades.
Strategy for 2026 Compliance
To stay ahead of CRA audits, ensure you are using your TFSA for long-term growth rather than rapid speculation. If you discover an over-contribution, the CRA advises that you withdraw the excess immediately and file Form RC243 to report the error. Acting “without delay” is the primary factor the CRA considers when deciding whether to waive or cancel interest and penalties.
Frequently Asked Questions
What is the penalty for over-contributing to a TFSA?
The CRA charges a 1% monthly tax on the highest excess amount for every month the funds remain in the account.
Can I day trade in my TFSA if I am not a professional?
No. If the CRA determines your trading frequency and behavior constitute “carrying on a business,” your gains will be taxed as business income regardless of your professional status.
How do I find my exact TFSA contribution room for 2026?
The most accurate method is to take your last CRA Notice of Assessment, add the $7,000 limit for 2026, and subtract any contributions you have made in the current year.
Ben Lee is a content writer specializing in government schemes and public benefit programs, delivering clear and up-to-date information to help readers understand eligibility, payments, and policy changes.