A taxpayer in St. John's deposited $9,200 into her TFSA in February 2021, believing she had room left over from the prior year. The CRA disagreed. Six months later, she received a notice assessing her $552 in overcontribution penalties, 1% per month on the excess $4,600, which she hadn't noticed until the letter arrived. She withdrew the funds the day she got the notice and filed a request for discretionary relief with the Minister of National Revenue, arguing she had relied on her bank's online portal, which showed available room. The Minister refused. She appealed to the Tax Court of Canada in October 2022. The case was dismissed before it was heard.

The Tax Court has no authority to waive TFSA penalties. That power sits with the Minister under subsection 207.06(1) of the Income Tax Act, which allows the CRA to cancel the tax if the overcontribution resulted from a "reasonable error" and the excess was removed without delay. The Tax Court's role is narrower: it determines whether the law was applied correctly, whether there was, in fact, an overcontribution. It cannot rule on fairness, mercy, or whether the CRA should have shown leniency. The taxpayer in St. John's had admitted the overcontribution. Her argument was that the penalty should be waived. That makes it a discretionary matter, not a legal one, and discretionary decisions are reviewed in Federal Court under judicial review procedures, not appealed in Tax Court.

The distinction matters more than the dollar figure

Filing in the wrong court doesn't just delay a resolution. It costs you the case outright. The Tax Court will dismiss the appeal for lack of jurisdiction. Federal Court applications for judicial review must be filed within 30 days of the Minister's final decision. If a taxpayer burns that window filing in Tax Court, they may forfeit the right to challenge the refusal at all. The CRA knows this. Taxpayers usually don't.

The procedural split also changes the argument. In Tax Court, the question is whether the CRA assessed the tax correctly, did the overcontribution happen, and if so, how much. In Federal Court, the question is whether the Minister's refusal to waive the penalty was reasonable and procedurally fair. Federal Court does not reassess the facts. It asks whether the CRA followed its own guidelines, considered the right factors, and acted within the bounds of administrative law. A taxpayer who can prove the overcontribution was due to a CRA error, say, the My Account portal showed incorrect room, has a stronger case for judicial review than one who relied on a bank's estimate.

The double-counting trap

The most common TFSA overcontribution isn't an arithmetic error. It's a timing one. A taxpayer withdraws $5,000 in July and re-contributes $5,000 in November, thinking the withdrawal freed up room. It didn't. Withdrawal room is only added back on January 1st of the following year. That November contribution is a $5,000 overcontribution, penalized at $50 per month until removed. The CRA does not consider this a "reasonable error." Neither do most Federal Court judges. Ignorance of the rule, even when the rule is counterintuitive, has not been accepted as grounds for discretionary relief in any reported case since 2018.

The taxpayer in St. John's eventually refiled in Federal Court in 2023. The court upheld the Minister's decision, finding that reliance on a third-party portal did not constitute a reasonable error when the CRA's My Account was available, however delayed its updates. She paid the $552, plus legal fees that exceeded the original penalty by a factor of four.