Canada Revenue Agency: Avoid the CRA Taxing Your New 2021 $6,000 TFSA

Invest in the Bank of Montreal to maximize the value of your new 2021 TFSA contribution room through its reliable dividends and avoid making these mistakes.

| More on:

The Tax-Free Savings Account (TFSA) has been a revelation for Canadians ever since the government introduced this account type in 2009. Designed to encourage Canadians to improve their savings practices, the TFSA is far more than a mere savings account.

The tax-advantaged account can allow you to achieve various short- and long-term financial goals if you use it as an investment vehicle. From saving up to make a down payment on your car to accumulating substantial wealth for a secondary retirement fund, the TFSA can do it all for you.

The account’s most attractive feature is its tax advantages. Any contributions you make to the account are in post-taxed dollars. It means that if your assets in the account generate any returns, the Canada Revenue Agency (CRA) cannot touch a cent as income taxes.

As amazing as it is, the TFSA does have its limitations. There may be certain situations that might see you end up compromising its tax-free status.

Contributing too much

Many TFSA users become very excited about the savings they can accrue through the account. However, there is a contribution limit to the account that the CRA keeps updating each year. As of 2021, the cumulative contribution room in the account is $75,500. It means that if you turned 18 in the year this account was introduced and have not contributed to the TFSA, you can contribute up to $75,500.

However, you should check with the CRA to find out what your remaining contribution limit is before you make a contribution to the account. Exceeding the contribution limit will allow the CRA to charge you 1% tax penalties for each excess dollar in your TFSA every month.

Day trading

The TFSA allows you to trade stocks using the account. However, it was not designed specifically for that purpose. It is the Tax-Free Savings Account and not a trading account. Many investors can get the bright idea to use their TFSA’s tax-sheltered status to carry out day trading without having to pay the CRA taxes for the transactions. However, using it for heavy trading can land you in trouble.

If you begin using it as a day trading account, the CRA will take notice and begin taxing your earnings as business income. It is better to use the account for long-term investments that can provide you with reliable returns.

U.S. dividends

Dividend stocks can let you generate tax-free passive income that the CRA can’t tax. However, you should not use your TFSA to store U.S. dividend stocks. If you are interested in companies that pay U.S. dividends, a Registered Retirement Savings Plan (RRSP) might be a better alternative.

The CRA charges a 15% withholding tax on dividend income from US companies. Besides the hefty tax, you cannot claim the tax credit for US dividends when you file your tax returns.

Canadian dividend earner to consider

The Bank of Montreal (TSX:BMO)(NYSE:BMO) is an excellent asset to consider if you are looking for a dividend-income stock that the CRA can’t tax in your TFSA.

BMO is a staple investment in investor portfolios with a long-term horizon. The bank has been providing its shareholders with reliable dividend payouts each year for the last two centuries. Additionally, it has been increasing its dividends for more than five years, making it a Canadian Dividend Aristocrat.

BMO took a significant beating due to the pandemic. However, its wide economic moat allows the bank to continue funding its increasing dividend payouts. The stock can be an excellent income-generating asset you can add to your TFSA portfolio. Trading for $95.75 per share at writing, it is paying its shareholders at a juicy 4.43% dividend yield.

Foolish takeaway

BMO is a picture of reliability in investor portfolios. The company has a strong dividend-paying streak that is older than most companies on the TSX and shows no sign of suspending its dividends despite the pandemic. It could be a good stock to consider as the foundation of a dividend income portfolio in 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

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

TFSA Investors: 3 Rock-Solid Dividend Payers Yielding up to 6.1 Percent

Here’s why Canadian Natural Resources (TSX:CNQ), Canadian Utilities (TSX:CU), and a high-yield REIT stand out as top Canadian dividend stocks…

Read more »

Man data analyze
Dividend Stocks

Invest $20,000 in This Dividend Stock to Earn an Average $88.73 Each Month!

Do you want monthly income that lasts? Investors can grab hold of at least $88.73 each and every month from…

Read more »

data analyze research
Dividend Stocks

Dividend Powerhouses: Top Canadian Stocks to Enhance Your Portfolio

These stocks have increased the dividend annually for decades.

Read more »

dividends grow over time
Dividend Stocks

The Smartest Dividend Stocks to Buy With $5,000 Right Now

The smartest dividend stocks on the market can provide decades of growth on autopilot. Here's how and what stocks you…

Read more »

Canadian dollars are printed
Dividend Stocks

Build a Lucrative Passive-Income Portfolio With Just $35,000

Canadians can build a lucrative passive-income portfolio with a small capital and a pair of dependable dividend payers.

Read more »

profit rises over time
Dividend Stocks

Buy 2,990 Shares of This Stock for $165.25/Month in Passive Income

A high-yield dividend stock can transform your investment into monthly passive income streams.

Read more »

close-up photo of investor Warren Buffett
Dividend Stocks

3 Warren Buffett Stocks to Buy Hand Over Fist in November

Warren Buffett has been buying Occidental Petroleum (NYSE:OXY) hand over fist. He previously owned the similar Canadian oil giant Suncor…

Read more »

dividend growth for passive income
Dividend Stocks

Is Intact Financial Stock a Buy for its 1.8% Dividend Yield?

Intact Financial's dividend is not that attractive, but its strong history of execution and dividend growth are compelling factors for…

Read more »