3 Ways the Canada Revenue Agency Can Tax Your TFSA

Be wary of the TFSA mistakes Canadians make! The CRA can tax and invest in stocks like Canadian Natural Resources stocks to maximize your income.

| More on:
Economic Turbulence

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Since its creation, the Tax-Free Savings Account (TFSA) has grown in popularity in Canada. The account type was introduced to encourage Canadian households to save more money. The TFSA allows you to earn on your investment completely tax-free.

As remarkable as the TFSA is, there are a few mistakes that Canadians make, which results in their assets being taxed. Here are the mistakes you need to avoid if you want to benefit from your TFSA fully.

Overcontribution

Many Canadians make the mistake of contributing too much to their TFSAs. The TFSA has a maximum contribution limit, which the government increases by around $6,000 every year. As of this writing, the total TFSA contribution room is $63,500. The contribution room will increase by a further $6,000 next year.

Contributions that exceed this amount will be liable to tax penalties, according to the Canada Revenue Agency (CRA). For any amount that goes over the contribution limit, you will have to pay a penalty of 1% every month until you withdraw the excess amount from the TFSA.

It is essential to keep track of your contributions and to be careful not to exceed the limit.

Trading too much

The fact that your TFSA’s earnings cannot be taxed might give you a bright idea of using the account for trading stocks in the account. Technically, you can do that, but it does not mean you should. If you do start using your TFSA for day trading, there will be consequences.

A TFSA is suitable for long-term holding. The government will keep track of your activity related to the TFSA. If it notices that you are making several hundred trades every year, your revenue will be treated as enterprise revenue. You will be taxed accordingly by the CRA. Therefore, stick to stocks that you can hold for the long run.

Holding stocks with U.S.-based dividends

If you are an investor who owns shares from the U.S. that pays dividends, a TFSA is not the ideal place to store it. There is a chance that you will end up having to pay a non-residents’ withholding tax on the dividend income from U.S. stocks.

The non-residents’ withholding tax is charged at a rate of 15%. Besides the tax, you cannot claim a foreign tax credit for U.S. dividends on your Canadian tax returns. Instead of holding your U.S. stocks in a TFSA, you can use your Registered Retirement Savings Plan where it will not be taxed. Canadian stocks with a decent dividend income are a far better option to consider for your TFSA.

For instance, stocks from Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ) can be an excellent stock to buy and hold in your TFSA. Also known as CNRL, Canada Natural Resources is the country’s leading independent natural gas producer. The company also has significant operations for natural gas liquids, offshore oil facilities, heavy oil, light oil, and oil sands.

The diversified sources of revenue enable CNRL to mitigate the volatility of market price fluctuations. The company can get the best returns on its investments due to its approach to business.

Foolish takeaway

Shareholders of CNRL stocks are particularly happy due to its reliable dividend payouts. At the time of this writing, you can pick up the company’s shares for $38.87, with a dividend yield of 3.86%. In 2019 alone, CNRL raised its dividend by 12%, and it has healthy fundamentals for further growth. I think holding Canadian dividend-paying stocks like CNRL and keeping track of your contributions can help you make the most of your TFSA.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Adam Othman has no position in any of the stocks mentioned.

More on Dividend Stocks

ETF chart stocks
Dividend Stocks

3 ETFs to Buy Now and Hold for Decades

Holding reliable growth ETFs for decades is one of the most tried and tested ways of building your wealth over…

Read more »

edit Back view of hugging couple standing with real estate agent in front of house for sale
Dividend Stocks

Housing Affordability Is Out of Reach for Many Canadians

The interest rate hikes will cool the real estate market, but the housing affordability crisis would worsen, as homeownership and…

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

2 Oversold Great Canadian Dividend Stocks to Buy Now and Own for 20 Years

These top Canadian dividend stocks look oversold right now and continue to raise their payouts.

Read more »

Man holding magnifying glass over a document
Dividend Stocks

3 Value TSX Stocks to Eye in July 2022

Here are a few value TSX stocks to check out in July 2022. They also pay juicy, safe dividend income…

Read more »

analyze data
Dividend Stocks

2 Canadian Stocks at the Top of My Buy List

Here are two of the top Canadian stocks on my buy list, as the market uncertainty continues to plague Canadian…

Read more »

money cash dividends
Dividend Stocks

TFSA Passive Income: 2 Top TSX Dividend Stocks to Buy on the Correction

These top dividend stocks look cheap to buy right now for a TFSA focused on passive income.

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Oversold TSX Stocks to Buy in July

Invests can now find good value right now in top TSX dividend stocks.

Read more »

Female hand holding piggy bank. Save money and financial investment
Dividend Stocks

2 Great TSX Stocks to Start a TFSA Retirement Fund During a Market Correction

These top TSX dividend stocks look cheap right now to buy for a TFSA retirement portfolio focused on passive income…

Read more »