Can CRA waive the TFSA over-contribution penalty if it was an honest mistake?

Possibly, yes, but it isn't automatic. CRA can, in appropriate circumstances, waive or cancel the TFSA over-contribution penalty tax where the excess arose because of a reasonable error and you acted quickly to withdraw the excess once you became aware of it. This is a discretionary relief request, similar in spirit to the general taxpayer relief provisions that apply to other kinds of penalties and interest, rather than something you're automatically entitled to just because the mistake was genuinely honest.

Because it's discretionary, CRA looks at the specific circumstances of your situation - how the over-contribution happened, whether it was a reasonable misunderstanding rather than something you should have caught, and importantly, how quickly you corrected it once you realized. Acting fast to withdraw the excess isn't just about limiting the monthly penalty that keeps accruing; it also strengthens your position if you go on to ask for relief, since a prompt correction supports the argument that the error was genuine and addressed responsibly. If you're considering asking CRA to waive a TFSA over-contribution penalty, being able to clearly explain how the mistake happened and show that you fixed it as soon as you knew is the core of a reasonable request.