The Canada Revenue Agency (CRA) will be at your back whenever you earn or make money. It’s the agency’s primary duty to collect taxes for the government. The taxes go back to the people through benefits and basic services.
However, it can’t be 100% of the time the CRA will take a portion of your earnings or income. The antidote to keep the tax collector away is a Tax-Free Savings Account (TFSA). Even if you earn $1,000 a month in a TFSA, the CRA won’t touch any income portion.
The TFSA is off limits
The TFSA is must-have personal savings account if you’re Canadian. Millions of people have been contributing to the unique investment vehicle since 2009. You can hold any combination of eligible investments such as cash, bonds, GICs, ETFs, mutual funds, and stocks.
Its most salient feature is that you can set aside money, pick your investment, and experience tax-free savings growth throughout your lifetime. If you need to withdraw funds at some point, the CRA will not tax any amount.
The CRA enters the picture when you over-contribute (1% monthly penalty tax of the excess). Also, CRA prohibits frequent trading. Don’t attempt to make stock trading a business as the tax agency will treat all income taxable.
Know the contribution limits
The CRA sets an annual TFSA contribution limit for each individual (you must be 18 or older) every year. This year, the maximum yearly contribution limit is $6,000. As of January 1, 2020, the total cumulative contribution room for a TFSA is $69,500
Remember that an unused contribution room from one year will carry forward and add to the TFSA contribution limit the following year. When you withdraw in a calendar year, you create an additional contribution room the next year.
In summary, a TFSA is an ideal all-purpose savings account that offers complete flexibility. It has a multitude of uses no other account can offer. More importantly, you build up tax-free savings until you achieve your financial goals.
How to earn $1,000 per month
Earning a $1,000 tax-free monthly income in your TFSA is possible. You would need $112,785 capital and a stock that pays a 10.64% dividend. Keyera (TSX:KEY) is the dividend stock that offers an equivalent yield. However, you must be aware of the risks of investing in a volatile sector.
Keyera is one of Canada’s largest independent midstream energy companies and a significant industry player for the past 20 years now. It has a market capitalization of $3.99 billion. The stock is down 42.78% year to date, so the current share price of $18.05 is relatively cheap.
The company currently operates 18 active gas plants, all of which are well maintained and have long economic lives. Also, Keyera’s core assets include an extensive gathering system (4,000 km of pipelines). A crucial consideration to investing in Keyera is that contracts with producers are long term. Thus, fee for service cash flows are enduring.
You can designate a successor holder (spouse or common-law partner) who can assume your TFSA in case of death. It will not affect the successor’s TFSA. Alternatively, you can appoint a beneficiary to receive funds in your TFSA plan upon your death.
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 Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends KEYERA CORP.