Fixing a Deceased Mother's TFSA and RRSP Overcontributions

The situation

Rania works as a security guard on the overnight shift at a Waterloo office park. When her mother, Min-ji, passed away earlier in the year, Rania was named executor — the person responsible for gathering the estate's assets, paying its debts, filing its taxes, and distributing what remains to the beneficiaries, in this case Rania and her brother Tarek, a landscaper. Min-ji had lived modestly and simply, and the estate looked straightforward at first: a small condo, a car, and two investment accounts held at her bank — a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP).

Both account types let Canadians grow investments without paying tax on the income each year, but each comes with an annual contribution limit set by the Canada Revenue Agency (CRA) based on the account holder's available room. Go over that limit and the CRA charges a penalty tax of one percent per month on the excess amount, for every month it stays in the account. Most people never see this tax because their bank or advisor tracks contribution room automatically. Min-ji's accounts were self-directed, and nobody had been tracking hers.

What the review found

Closing out a deceased person's accounts means pulling years of statements, and it was while doing exactly that — cross-checking contribution slips against CRA's recorded limits for each year — that Rania noticed the numbers did not add up. Min-ji had kept contributing to her TFSA every January for several years running, apparently unaware that a large withdrawal she made partway through one year did not restore that year's room the way she assumed it did. The result was a TFSA excess that had built up to roughly $22,000. Separately, Min-ji had also kept contributing to her RRSP for two more years after she had, in fact, already used up all of her available room, adding another roughly $9,000 in excess contributions. RRSP overcontribution rules do allow a small cumulative cushion, currently $2,000, before the penalty tax applies, but Min-ji's RRSP excess ran well past that cushion. Together, the two accounts held about $31,000 more than CRA rules allowed, of which roughly $29,000 was exposed to the monthly penalty tax once the RRSP cushion was accounted for.

This mattered for two reasons. First, the penalty tax does not stop accruing at death. As executor, Rania was now responsible for the deceased's final tax return and for any tax the estate owed, and every month the excess sat uncorrected added roughly one percent of the $29,000 exposed to the tax — about $290 — to what the estate would eventually owe. Left alone for even a few more months, that would have meant several thousand dollars in accumulated tax coming straight out of what Rania and Tarek were set to inherit. Second, the CRA does have discretion to cancel or waive this tax, but only where the taxpayer (or, after death, the estate) can show the excess arose from a reasonable error and that reasonable steps were taken to fix it without delay once discovered. Rania had just discovered it. The clock on "without delay" had started.

She came to Treadstone Law with the statements in hand and a straightforward question: was this her problem to fix before she could distribute the estate, and how fast did it need to happen.

What we did

1. Confirmed the excess amounts precisely. Our tax team reconstructed Min-ji's contribution room year by year for both accounts, using her notices of assessment and contribution slips, to pin down the exact excess in each account rather than working from Rania's estimate. Getting this number right mattered — withdrawing too little would leave a residual excess still accruing tax; withdrawing too much would create an unnecessary loss of tax-sheltered room the estate could otherwise have used.
2. Withdrew the excess immediately to stop the tax from growing. Because the penalty tax is calculated monthly on the highest excess balance in the account, the single most effective move was also the simplest: withdraw the excess amounts from both accounts right away, before doing anything else. We coordinated with the bank holding the accounts to process the withdrawals as executor transactions, which stopped any further tax from accruing from that point forward.
3. Prepared the required CRA filing disclosing the overcontribution. Overcontributions have to be reported to the CRA on a specific return even when the taxpayer intends to ask for the tax to be waived — filing it is not optional and is itself one of the "reasonable steps" the CRA looks for. We prepared and filed this on the estate's behalf, covering both the TFSA and RRSP excess.
4. Built the waiver request around a clear, honest narrative. A waiver is not automatic; the CRA wants to see why the error happened and why it wasn't corrected sooner. We set out plainly that Min-ji had misunderstood how TFSA withdrawals affect contribution room — a genuinely common and reasonable mistake, since room is not restored until the following calendar year — and that the RRSP overcontributions stemmed from continuing automatic contributions without realizing her room had run out. We paired that explanation with evidence that, once the error surfaced during estate administration, it was corrected within days.
5. Kept the estate's other obligations moving in parallel. We did not let the overcontribution issue stall the rest of the estate work. Rania was able to continue applying for the certificate that confirms her authority as executor, and to keep other creditors and the final tax return on track, while the waiver request was under review.

The outcome

The CRA's response came several months later. It accepted the waiver request in full for both accounts, cancelling the penalty tax that had accrued up to the point the excess was withdrawn. The estate's tax exposure on the overcontributions dropped from a figure that had been growing by roughly $290 a month to effectively nothing beyond the modest amount that had already accumulated before Rania discovered the problem, which the CRA also agreed to cancel as part of the same decision.

Because the withdrawals happened quickly and the filing was thorough, the estate avoided what could otherwise have become a five-figure erosion of what Rania and Tarek stood to inherit. The condo and car sale proceeds, along with the now-corrected investment accounts, were distributed to the two of them roughly on the timeline Rania had originally hoped for, with only the CRA review adding a few months of waiting at the end.

Rania later said the hardest part was not the tax itself but the worry, in the weeks before the waiver decision came back, that she had done something wrong simply by not catching the problem sooner. She hadn't. The overcontributions were her mother's error, made in good faith, years before Rania had any role in the accounts at all — and the CRA's willingness to waive the tax reflected exactly that.

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