Individuals who contribute excess amounts into their TFSA are subject to a penalty tax of 1%/month on the excess amount for each month that the TFSA is overcontributed. However, CRA has the discretion to waive this penalty tax if the excess amount resulted from reasonable error and the excess contribution, plus any income or capital gains reasonably attributable to them, is withdrawn without delay.

CRA recently considered whether relief on this penalty tax could be provided where the value of the TFSA had reduced to nil. They opined that, as the excess contribution could not be withdrawn without delay, they would not have the discretion to waive the penalty tax. As such, the penalty tax would continue to apply until the individual accumulated enough additional TFSA room to cover the excess contribution.