Canada Revenue Agency: How to Avoid This $75 Million TFSA Mistake

The way to avoid paying taxes to the CRA due to over contribution in your TFSA is to be aware of the contribution limits. You can keep all earnings from dividend-payers such as the Cervus stock and Exco stock too.

| More on:

The Canada Revenue Agency (CRA) runs after TFSA users who misuse or mismanage the account. About $75 million are due for collection by the agency from people who made contributions beyond the legal limit. Those who were caught trading in the TFSA for business income are only a small percentage.

Over contribution is the common mistake of TFSA users. Every year since 2009, there is a set contribution limit, and the contribution room accumulates as well. In 2019, the limit is $6,000 while the total accumulated limit is $63,500. Next year, the annual contribution is the same as this year.

Acceptable investments

You can hold various investments in your TFSA such as bonds, GICs, mutual funds, ETFs, and stocks. Dividend stocks are the preferred investments because of higher overall returns. Likewise, all earnings are tax-free.

With the tax-free nature of the account, stocks such as Cervus (TSX:CERV) and Exco (TSX: XTC) appeal to TFSA users today. Both are trading at little over $8, but the dividends are juicy.

Cervus is a small-cap industrial stock but a world-leading equipment dealer carrying iconic brands such as John Deere, Peterbilt, and JLG, among others.

This $126.3 million company sells agricultural, transportation, and industrial equipment. It also provides after-sales and maintenance services.

The stock is underperforming, if not beaten this year. As of this writing, the price is $8.24, which is down 33.38% year-to-date. Cervus did not impress with its Q3 2019 results. Equipment declined by 26% due to the weak agricultural market in Western Canada.

The net loss of $1.7 million pales in comparison with the $12 million income during the same period in 2018, but given the current run-rate, Cervus might still post positive numbers to end the year.

The dividend yield of 5.43% is enticing. If you have an available TFSA contribution room of $6,000, the stock can generate an annual passive income of $325.80. You can compute how much more extra income you can earn with a higher investment.

Exco is another choice of TFSA users because of the 4.31% dividend and the low payout ratio of 54.62%. The business has been soft over the last four years. Nevertheless, the company has been reporting profits from fiscal years 2016 to 2019.

The auto parts industry is in a slump, although the latest revenue figures were in line with forecasts. Management admits that the fiscal year 2019 was a difficult period. Increasing costs in the Automotive Solutions segment brought down year-over-year profitability.

Exco is optimistic in 2020. The improving global economy could drive up the level of profitability. Bear in mind that aside from North America, the company has a market presence in Asia, Europe, Mexico, and South America. It’s also banking on the Large Mould segment to make a turnaround.

Once the automotive industry improves in the foreseeable future, Exco expects to realize above-market growth as well. For now, you can enjoy the high dividends.

Last word

Always keep track of the TFSA contribution limits and available room so as not to be notified by the CRA. Some of your earnings from dividend stocks like Cervus and Exco might go to taxes in case the agency penalizes you for over-contribution.

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool owns shares of EXCO TECH.

More on Dividend Stocks

diversification and asset allocation are crucial investing concepts
Dividend Stocks

The OAS Clawback Can Start Before You Feel Rich: Here’s How to Get Ahead of It

OAS clawbacks can hit “regular” retirees once taxable income gets high enough, so building tax-free flexibility before retirement matters.

Read more »

truck transport on highway
Dividend Stocks

Got $1,000? I’d Buy This TSX Stock Before the Next Dip Gets Smaller

Market dips rarely wait for you to feel ready, and a “small” pullback can disappear fast if the business keeps…

Read more »

dividends can compound over time
Dividend Stocks

The First $100,000 Is the Hardest: Here’s How I’d Build the Next $100,000 Faster

The first $100,000 feels slow because you’re doing most of the work, but compounding starts carrying more of the load…

Read more »

how to save money
Dividend Stocks

Down 41% and Still Yielding 5.6%: 1 Canadian Stock I’d Snap Up

Telus stock has fallen 41%, but its 5.6% yield and aggressive debt-reduction strategy could make today’s discounted price worth a…

Read more »

dividend stocks are a good way to earn passive income
Dividend Stocks

The 7.4% Dividend Stock Paying Cash Every 30 Days

If you're looking for reliable monthly income, Firm Capital Property Trust now offers a 7.4% yield with payouts every 30…

Read more »

Business success of growth metaverse finance and investment profit graph concept or development analysis progress chart on financial market achievement strategy background with increase hand diagram
Dividend Stocks

1 Top TSX Dividend Stock Down 13% to Buy and Hold for Decades

This TSX giant now offers a 5.6% dividend yield.

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

A $7,000 TFSA Won’t Build Itself: This Is the Stock I’d Start With Today

A TFSA won’t build itself, so your first $7,000 should go into a sturdy business you can hold through ugly…

Read more »

Young adult concentrates on laptop screen
Dividend Stocks

The 3 Canadian Stocks I’d Tell a New Investor to Buy ASAP

These three Canadian stocks give new investors dividend income, resilience, and long-term growth across utilities, railways, and bank stocks.

Read more »