What is the relevant tax for over-contributions to a TFSA?

The relevant tax for over-contributions to a Tax-Free Savings Account (TFSA) is a 1% tax on the excess contribution amount. When an individual contributes more than their allowable TFSA limit, the Canada Revenue Agency (CRA) imposes a monthly penalty on the excess amount. The tax is calculated at 1% of the excess contributions for each month that the excess amount remains in the account.

This tax serves to discourage individuals from over-contributing, ensuring that TFSAs maintain their intended purpose as a tax-advantaged savings vehicle. Understanding this penalty is crucial for TFSA holders, as it highlights the importance of monitoring contributions to avoid unnecessary tax liabilities.

In contrast, the other options do not align with the TFSA rules. For example, a flat fee of $100 per month does not accurately reflect how the CRA penalizes over-contributions. Additionally, a penalty tax based on the individual's income would complicate the tax structure surrounding TFSAs, which are meant to be straightforward savings accounts. Lastly, stating that there is no tax at all for over-contributions is incorrect, as the tax on excess contributions is a significant consideration for TFSA holders.