TFSA Mistakes That Quietly Cost BC Investors

A Coquitlam couple pulled $12,000 out of their TFSA in June to redo a tired kitchen. The job came in under budget, so in November they put the full $12,000 back, proud of themselves for staying disciplined. The next spring, a letter from the Canada Revenue Agency showed up with a tax bill inside. They hadn't earned an extra dollar. All they'd done was move their own money back into their own account.

That's the trouble with the TFSA. The rules look simple enough that most people never read them, and the mistakes don't announce themselves. They surface quietly, months or years later, as a smaller balance than you expected or a letter you weren't expecting.

It's mid-September 2026, which makes this a good moment to check. Fall is when a lot of families top up before year end, and it's exactly when a mistimed deposit does the most damage. Here are the mistakes I see most often with families around Burnaby and the rest of Metro Vancouver, along with the actual rules behind them.

Putting money back in the same year you took it out

This is the big one. Your available room is the current year's dollar limit, plus unused room carried forward, plus withdrawals you made in previous years, minus what you've already put in this year. The CRA is blunt about the timing: "When you withdraw from your TFSA, you will regain the same amount as new available contribution room on January 1 of the following year" (CRA, Calculate your TFSA contribution room). The same page confirms the TFSA dollar limit for 2026 is $7,000.

So a June withdrawal does nothing for your room in June. If that couple only had this year's $7,000 of room to begin with, the November re-contribution put $5,000 more into the account than the rules allow. If they'd simply waited until January 1, 2027, they'd have been fine.

The cost is 1% a month. The Income Tax Act spells it out: an individual with an excess TFSA amount "shall, in respect of that month, pay a tax under this Part equal to 1% of the highest such amount in that month" (Income Tax Act, s. 207.02). Read that closely. It's the highest amount in the month, so pulling the excess out on the 28th doesn't save you that month's charge.

The CRA's advice is to withdraw the excess "as soon as possible" and not to wait to hear from them. You still have to report it by filing a TFSA return, and the CRA warns that a deliberate over-contribution "may" bring additional tax consequences (CRA, If you over-contribute to a TFSA).

There is some grace. The CRA says it "can waive or cancel all or part of the taxes if we determine it is fair to do so after reviewing all factors" (CRA tax tip, Watch your limit and stay within it). It isn't automatic, and it isn't something to plan around.

Assuming somebody else is keeping score

The same CRA reminder puts the job squarely on you: "Although it's your responsibility to manage your TFSA contributions and withdrawals, your financial institution can help you to track your contribution limit."

If you hold a TFSA at a credit union in New Westminster and another at a bank downtown, nobody sees the whole picture but you. A simple habit covers most of the risk:

• Write down the date and amount of every contribution and every withdrawal, in every TFSA you own.
• Beside each withdrawal, note the January 1 when that room comes back.
• Before any deposit, check the total against your own tally, not just the balance on the screen.
• Moving a TFSA between institutions? Ask for a direct transfer instead of withdrawing and re-depositing.

Statistics Canada reported that 7.5 million tax filers contributed to a TFSA in 2023, with a median contribution of $6,500, exactly that year's annual maximum (Statistics Canada, RRSP, TFSA and FHSA Contributions, 2023). That's a lot of people contributing right at the line, where one mistimed deposit tips them over.

US dividends leaking out the side

The Canada and United States tax treaty exempts from withholding tax the dividend income of a trust or organization "constituted and operated exclusively to administer or provide benefits under one or more funds or plans established to provide pension, retirement or other employee benefits," and it caps withholding on ordinary portfolio dividends at 15% (Canada-United States Tax Convention Act, 1984, Articles X and XXI).

An RRSP is a retirement plan. A TFSA, by name and design, is a savings account. That difference matters if you hold US dividend-paying stocks. The withholding generally applies inside a TFSA, and because a TFSA pays no Canadian tax on that dividend, there's no Canadian tax bill for a foreign tax credit to reduce. On a $50,000 US dividend portfolio yielding 2%, that's roughly $150 a year that never shows up as a line item anywhere. Nobody notices it, which is exactly the problem.

Naming the wrong kind of survivor

Only a spouse or common-law partner can be named a successor holder, and the CRA defines that person as "a spouse or common-law partner of the holder at the time of death" (CRA, Definitions for TFSA). A successor holder "immediately becomes the new holder and assumes ownership of the TFSA," and the value at death plus everything earned afterward stays sheltered (CRA, If you are a successor holder of a TFSA).

Name that same spouse as a designated beneficiary instead and the treatment changes. Amounts up to the fair market value at the date of death come out tax free, but "any TFSA earnings made after the date of death and before the estate is settled are taxable." A surviving spouse can still shelter the money by making an exempt contribution during the rollover period, then sending Form RC240 to the CRA "within 30 days of making the contribution" (CRA, If you are a designated beneficiary of a TFSA). That's a paperwork deadline landing in the middle of a hard year, and it gets missed.

Leaving the designation blank is worse, because the account generally falls into the estate. In BC that has a price. The Probate Fee Act charges $6 for every $1,000 of estate value between $25,000 and $50,000, and $14 for every $1,000 above that (Probate Fee Act, BC Laws). Checking which box you ticked takes five minutes.

Contributing after you leave Canada

Metro Vancouver is a place people move to and from. If you become a non-resident, contributions after that date are taxable non-resident contributions, subject to "a 1% tax for each month the contribution remains in the account," running until you withdraw it or become a resident again (CRA, How non-residency affects your TFSA). Your existing balance keeps growing tax free in Canada, but the CRA also warns that "TFSA withdrawals may be taxed in your country of residence."

Trading it like a casino

Tax-free growth tempts some people into very active trading. The CRA's position is that where a TFSA carries on a business or holds a non-qualified investment, "the TFSA trust is taxable on any income earned on, and any capital gains derived from the non-qualified investment or business," reported on a T3 trust return (CRA, Tax payable on non-qualified investments). The whole point of the account disappears.

What this doesn't tell you

Some honest limits on all of the above:

• There's no bright line on trading. The CRA decides whether a TFSA is carrying on a business case by case, so nobody can tell you exactly how many trades is too many.
• The data is national and getting older. Statistics Canada's most recent release covers the 2023 tax year and isn't broken out for British Columbia (provincial tables are published separately). The agency says the 2024 figures, originally due in spring 2026, are delayed to winter 2026/2027 because of a tax file redesign (Statistics Canada, RRSP, TFSA and FHSA Contributions, 2023).
• Foreign withholding is a general pattern, not a universal rule. How any particular holding, fund structure or country is treated depends on the security and on your own tax situation.
• Whether a TFSA beats an RRSP for you is genuinely open. It turns on your tax rate now versus later, and on income-tested benefits. There's no single right answer, and anyone who hands you one without asking about your income hasn't done the work.
• Numbers change. The $7,000 limit is the 2026 figure. Always check the current CRA page before you act, especially for 2027.

This article summarises published rules and research for general information, is current as of the date shown above, and is not personalized financial, tax or legal advice.

Sources

• Canada Revenue Agency, Calculate your TFSA contribution room, 2026. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/contributing/calculate-room.html
• Canada Revenue Agency, If you over-contribute to a TFSA, 2026. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/contributing/overcontribute.html
• Canada Revenue Agency, Reminder: Tax Free Savings Account, watch your limit and stay within it!, 2025. https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2025/tax-free-savings-account-limit.html
• Canada Revenue Agency, Definitions for TFSA. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/definitions-tfsa.html
• Canada Revenue Agency, If you are a successor holder of a TFSA. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/death-of-holder/successor-holder.html
• Canada Revenue Agency, If you are a designated beneficiary of a TFSA. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/death-of-holder/beneficiary.html
• Canada Revenue Agency, How non-residency affects your TFSA. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/non-resident.html
• Canada Revenue Agency, Tax payable on non-qualified investments (TFSA issuers). https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/tax-free-savings-account-tfsa-issuers/taxes.html
• Department of Justice Canada, Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), s. 207.02. https://laws-lois.justice.gc.ca/eng/acts/i-3.3/section-207.02.html
• Department of Justice Canada, Canada-United States Tax Convention Act, 1984, Articles X and XXI. https://laws-lois.justice.gc.ca/eng/acts/C-10.7/FullText.html
• Statistics Canada, The Daily: RRSP, TFSA and FHSA Contributions, 2023, released April 1, 2025. https://www150.statcan.gc.ca/n1/daily-quotidien/250401/dq250401a-eng.htm
• Province of British Columbia, Probate Fee Act, S.B.C. 1999, c. 4. https://www.bclaws.gov.bc.ca/civix/document/id/complete/statreg/99004_01

Not sure where your own TFSA room sits, or whether your beneficiary designation says what you think it says? It's worth sorting out before your next contribution, and well before January. Book a free, no-pressure call with Milo Sarmiento, an independent broker in Burnaby who works with families across Metro Vancouver in English and Tagalog. We'll walk through your situation together, with no sales pitch.