Canada Revenue Agency: 90% of Canadians Are Making This TFSA Mistake

The Canada Revenue Agency allows Canadians to use the TFSA to invest their money tax-free, yet nearly all Canadians make this one simple mistake.

| More on:
You Should Know This

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

The Tax-Free Savings Account (TFSA) is one of the best tools that Canadians have at their disposal. Being able to invest a considerable amount of your money and avoid paying any tax on that income to the Canada Revenue Agency is something that shouldn’t be taken for granted.

Just last week, we saw stocks across the board sell off over the very mention of higher capital gains taxes in the United States. Taxes play a significant role in investing decisions. So, having an account that has minimal restrictions and gives you substantial earnings potential is an incredible opportunity.

However, according to the Canada Revenue Agency, nearly 90% of Canadians haven’t maxed out their TFSA.

It may not be practical to expect all Canadians to max out their TFSAs. Everyone’s personal finances are different. Some Canadians may prefer the RRSP for tax purposes, as an example. However, the TFSA is still one of the greatest tools that Canadians have. So, it’s surprising that only slightly more than 10% are maxing out their contributions.

Canada Revenue Agency: What to know about the TFSA

One of the biggest reasons why the TFSA has the potential to be so impactful on your personal finances is because Canadians get a generous amount to invest tax-free.

If you’ve been eligible since year one when the TFSA was introduced, you have a total contribution limit of $75,500. That’s a tonne of money that you can begin to put to work for you.

Furthermore, the Canada Revenue Agency understands that Canadians may face unexpected emergencies and need cash to deal with them. So, there are no restrictions on withdrawing money from your TFSA.

You don’t even need to recontribute it. However, if you want to put the money back in, all you have to do is wait until the next calendar year, and you can recontribute the total amount.

One other thing to note is that the Canada Revenue Agency also warns investors not to do too much trading in the account. If they deem an individual’s day trading to be business activities, they could come at you for taxes owed.

The best way to use the TFSA is to find high-quality growth stocks that can consistently grow long term. This way, you can compound your money rapidly and grow your portfolio for years to come.

A top Canadian stock to buy today

If buying and holding stocks for the long term was what the Canada Revenue Agency wants to see Canadians use their TFSA for, then InterRent REIT (TSX:IIP.UN) might be the perfect stock for the account.

InterRent is a residential real estate fund — one of the most defensive industries you can invest in. Despite operating in a highly defensive industry, though, InterRent has been a rapid growth stock.

In fact, it’s one of the top Canadian growth stocks of the last decade, up a whopping 1,078%, or just shy of a 28% compounded annual growth rate.

The growth has been spectacular for InterRent, which is why it’s the perfect stock to buy in your TFSA. Not only is it relatively safe, but investors who own it in their TFSA won’t have had to pay any taxes to the Canada Revenue Agency on that more than 1,000% gain.

There’s no reason why this impressive growth can’t continue either. InterRent’s business model is fairly simple. The fund has generally invested in assets it’s found to be undervalued or in need of investment.

InterRent then renovates the buildings considerably, increasing both the asset’s value and the cash flow it can generate. You can think of it as the fund “flipping houses,” except on a much larger scale. It’s done this countless times, which is why the stock has seen such strong and consistent growth.

So, if you’re looking for a top long-term growth stock you can buy in your TFSA, InterRent is one of the best to consider.

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 Daniel Da Costa owns shares of INTERRENT REAL ESTATE INVESTMENT TRUST.

More on Dividend Stocks

funds, money, nest egg
Dividend Stocks

TFSA Passive Income: 2 Great Canadian Dividend Stocks for Retirees to Buy Now

Retirees seeking reliable passive income can now buy top TSX dividend stocks at cheap prices.

Read more »

data analyze research
Dividend Stocks

Earn Monthly Passive Income: 2 Hot Dividend Stocks in Canada to Buy Now and Hold Forever

These two hot dividend stocks could help you to earn stable monthly passive income in Canada.

Read more »

Human Hand Placing A Coin On Increasing Coin Stacks In Front Of House
Dividend Stocks

Be a Landlord: Top 2 REITs (With Monthly Dividends) I’d Buy and Forget

You can be a landlord and earn monthly dividends for the rest of your life. All you need is the…

Read more »

A worker gives a business presentation.
Dividend Stocks

Got $5,000? 3 Stocks to Hold for the Next 20 Years

New investors don’t need tens of thousands to start a portfolio. Here are three stocks to hold for the next…

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

Earn $370 Every Month with These 3 Dividend Stocks

These three Canadian dividend stocks could boost your passive income.

Read more »

data analytics, chart and graph icons with female hands typing on laptop in background
Dividend Stocks

3 Dividend Stocks to Buy Hand Over Fist

Investing in dividend stocks could help you reach a comfortable retirement. Here are three stocks to start buying hand over…

Read more »

Retirement plan
Dividend Stocks

4 Stocks That Could Turn $100,000 Into $500,000 by the Time You Retire

Companies such as Brookfield Asset Management have the potential to consistently beat the broader markets and deliver stellar returns to…

Read more »

money while you sleep
Dividend Stocks

Need Passive Income? 2 TSX Stocks to Earn $500/Month Without Losing Sleep

By investing in Enbridge and Keyera stock, investors can make $500/month.

Read more »