Canada Revenue Agency: 3 Critical TFSA Mistakes to Avoid in 2020

Invest in Granite REIT to make the most of the TFSA, while avoiding these mistakes.

| More on:
edit Real Estate Investment Trust REIT on double exsposure business background.

Image source: Getty Images

A Tax-Free Savings Account (TFSA) is the best tool in your arsenal when it comes to achieving financial freedom.

A TFSA allows you to shield your capital from the Canada Revenue Agency (CRA) and its taxes. It does not matter how long your investments sit in the account or how much it grows. You get to keep 100% of any capital gains, interest, and earnings from your assets without paying income tax on them.

TFSAs are tax-proof but not foolproof. Many investors don’t use their TFSAs to their full potential. Investors also make critical mistakes that can compromise the tax-sheltered status of their accounts.

I am going to discuss these crucial TFSA mistakes so that you don’t make them and end up paying money to the CRA because of your TFSA.

Not investing regularly

The biggest mistake most Canadians make with their TFSAs is not investing regularly. If you invest correctly in your TFSA and max out the contribution room, you can earn a lot more down the road. You waste substantial potential long-term income if you do not use the full contribution room in your TFSA.

Not knowing your limit

Where some investors do not use the TFSA contribution room fully, others can be too eager to contribute to the account. It literally pays to know your limits when it comes to your TFSA. There is a maximum contribution room for the TFSA that the government updates each year. For 2020, the maximum contribution room is $69,500.

It means that since the beginning of the TFSA in 2009 up to 2020, you can hold $69,500 in cash or equivalent assets in your TFSA. This assumes you were 18 or older in 2009 – if not, you only have the cumulative contribution room of the years since you turned 18. If you contribute more than the limit, the excess amount is liable to taxation from the CRA, and the government will happily collect.

Not investing in income-producing assets

Filling up the contribution room in your TFSA by holding cash is a waste. The tax-sheltered status of the TFSA means any asset you hold in your account can sit there tax-free. It also means if the assets grow in value due to market appreciation, or they produce income through dividends, your wealth can grow significantly without affecting your contribution room.

Simply holding cash in the account is a waste of space due to low-interest rates. $30,000 worth of shares of an income-producing asset like Granite REIT (TSX:GRT.UN) can become worth far more than $30,000 in cash over time.

Granite, like its name, is a solid asset to consider. It is one of the largest and highest-quality industrial real estate investment trusts (REITs) in Canada. The REIT has more than 80 industrial and logistics properties in its portfolio, totalling around 40 million square feet. Its geographically diverse portfolio is spread across the U.S., Canada, and Europe.

In 2019, its net operating income (NOI) increased by 9.6% from the previous year. It also acquired eight million square feet of space for higher-grade tenants like Amazon.

Granite has a phenomenal balance sheet going into 2020. Its net leveraged ratio is just 21%. It has substantial exposure to international markets. Its most recent refinancing of a $300 million term loan saw its coupon rate drop by 80 basis points as well.

The REIT has the potential to outperform Canada’s REIT index for several years to come. At writing, the REIT is trading for a discount due to the market crash. Trading for $63.29 per share, the stock pays its shareholders a juicy 4.59% dividend yield.

Foolish takeaway

Using the contribution room in your TFSA with income-producing assets can allow you to grow your long-term wealth  substantially. You could invest in a rock-solid REIT like Granite to leverage its capital gains as the market recovers. While you wait for the dust to settle from the recession, your TFSA can grow through its dividend payouts.

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.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Adam Othman has no position in any of the stocks mentioned. David Gardner owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon.

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »