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Prep Your TFSA: 1 Mistake Could Lead to Huge Penalties

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The Tax-Free Savings Account (TFSA) has been around for over a decade now, and it has been a massive revelation for Canadians. The Canada Revenue Agency (CRA) can’t touch earnings on your investments in the account, making it an excellent tool for Canadian investors.

Despite the TFSA’s introduction in 2009, many people still do not fully understand the tax-advantaged account. Investors tend to make mistakes with their TFSAs. Several of the common mistakes result in them being unable to maximize the potential benefits of the TFSA.

However, some mistakes can prove to be too much, and the CRA can come knocking on their doors with massive penalties. I will discuss one massive TFSA mistake that you should avoid and a better way to use your tax-advantaged account.

Crucial TFSA mistake to avoid

The TFSA was created to encourage Canadians and improve their savings practices and invest their money. It means that you can use your account to trade. However, the account’s name still implies that it is there for you to save and not actively trade. You should use the contribution room in your TFSA to hold investments in the long run to reap the benefits of returns from your assets.

Unfortunately, some Canadian investors mistake taking the TFSA’s tax-advantaged status as a license to trade in the account for profits actively. The CRA keeps a close eye on investors using their TFSA to trade for tax-free profits. If the government agency catches you, you risk losing the tax-free status of your account, which means that the CRA will treat any income from your TFSA beyond that point as business income.

Making proper use of your TFSA

If you want to maximize the benefits aligning with the intended purpose of the TFSA, it would be best to use the contribution room to create a portfolio of income-generating assets. The Bank of Montreal (TSX:BMO)(NYSE:BMO) is an excellent stock to begin building such a portfolio in your TFSA.

Creating a robust TFSA portfolio that you can hold onto for the long run can help you generate substantial passive and tax-free income to become a wealthier investor in the long run. BMO is an ideal stock pick for this purpose because of its reliable history of providing its shareholders with returns on their investments.

The Canadian bank has paid shareholders dividend payouts for more than 190 consecutive years. It is one of the longest dividend-paying streaks among Canadian companies, virtually guaranteeing that payouts are backed by the bank’s ability to deliver strong earnings growth consistently.

The bank took a beating due to the economic fallout from COVID-19. Still, it managed to continue delivering results due to its wide economic moat. With an improving operating environment and economic recovery on the cards, BMO will likely continue its streak indefinitely.

Foolish takeaway

BMO has paid its investors dividends for a long time and delivered returns on investments through its capital gains over the decades. The Canadian Dividend Aristocrat will likely continue its strong streak, making it an ideal pick for your TFSA portfolio to become a wealthy investor in the long run.

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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.

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