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

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.

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

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