The Motley Fool

TFSA Pension: How to Turn $6,000 Into $190,000 and Pay No Tax to the CRA

Image source: Getty Images

While Canadians have relied on pension programs such as the Canada Pension Plan and the Old Age Security (OAS) to fund their retirement, it is always good to have alternative sources of income. Canadians who are saving for retirement can also look at investing in registered accounts such as the Registered Retirement Savings Plan, or RRSP.

However, the Canada Revenue Agency (CRA) might tax all the above-mentioned sources of income. So, you need to consider alternatives that allow you to increase your retirement income without paying additional taxes to the CRA.

For example, retirees who receive the OAS pensions are at risk of seeing these payouts clawed back if the net income is above the minimum threshold amount. Alternatively, the TFSA (Tax-Free Savings Account) is a great tool to build retirement wealth, as you don’t have to pay any taxes on withdrawals.

The TFSA contribution limit for 2021 is $6,000, which means the maximum cumulative contribution room is $75,500.

Hold growth stocks in your TFSA

Canadians can look to hold growth stocks in the TFSA and benefit from exponential gains as well as the power of compounding. One of the top growth stocks in Canada is Constellation Software (TSX:CSU), a company that has returned a stellar 3,100% to investors in the last 10 years.

This means a $6,000 investment in Constellation Software back in January 2011 would have ballooned to $192,000 today. While past returns are irrelevant to future investors, it makes sense to invest in companies that have a history of market-beating gains over the long run.

Constellation Software provides software-related services to enterprises in the private and public sectors. It acquires, manages, and builds software businesses that develop mission-critical software solutions.

Founded in 1995, Constellation Software has assembled a robust portfolio of vertical market software companies. The company stated, “We have grown rapidly through a combination of acquisitions and organic growth, and established a strong constellation of companies with a large, diverse customer base comprised of over 125,000 customers operating in over 100 countries around the world.”

5 TSX Stocks Under $5

Click here to learn more!

CSU continues to grow sales at a stellar pace

In the third quarter of 2020, CSU sales were up 15% at $1 billion, compared to sales of $870 million in the prior-year period. Its net income rose 50% to $122 million from $82 million. In Q3, CSU spent $123 million in acquisitions while its cash flow from operations rose 32% year over year to $57 million.

In the first nine months of 2020, sales were up 14% at $2.88 billion. The company attributed top-line growth to acquisitions, and after adjusting for inorganic growth, sales were down 1% year over year.

Constellation Software acquires companies that are profitable and growing at a fast pace. Its suite of mission-critical services means that switching costs are high, allowing it to have a strong customer-retention rate.

Constellation Software stock is valued at a market cap of $34.1 billion, which means its trading at a forward price-to-2021-sales multiple of 7.4 and a price-to-earnings multiple of 38, which might seem expensive.

However, analysts expect the company to grow earnings at an annual rate of 24% in the next five years. Comparatively, its sales growth is forecast to accelerate from 12.4% to $3.92 billion in 2020 to 17.8% to $4.62 billion in 2021.

5 Canadian Growth Stocks Under $5

We are giving away a FREE copy of our "5 Small-Cap Canadian Growth Stocks Under $5" report. These are 5 Canadian stocks that we think are screaming buys today.

Get Your Free Report Today

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.

The Motley Fool owns shares of and recommends Constellation Software. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.