Boost Your Passive Income: 2 Money-Making Tips the CRA Tries to Keep Hidden

Passive income earners can get a boost if investors know these advantages the CRA does not usually openly share.

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Canadians can earn passive income on a tax-free basis, provided the sources or income-producing assets are held in a tax-advantaged or tax-sheltered account. The balances in a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) compound faster because money growth is tax-free.

However, TFSA withdrawals are tax-exempt, while money taken from an RRSP is taxable. Besides setting annual limits, the Canada Revenue Agency (CRA) penalizes users who violate contribution and investing rules. On the other hand, there are ways to boost or preserve passive income and not pay penalties whatsoever, but the CRA is silent about them.

TFSA transfer and contribution

The golden rule in a TFSA is that you can’t contribute beyond the limit or risk without paying a 1% penalty on the over-contribution. If you own more than one TFSA account, know the difference between a transfer and a separate contribution. You can transfer funds from one account to another and not affect the contribution room, provided the transfer is done directly between the TFSA accounts.

However, withdrawing money from one TFSA and contributing the same amount to another TFSA is considered a separate contribution, not a transfer. Thus, it could reduce or exceed your TFSA contribution room for the year. The CRA will step in and charge a penalty tax.

RRSP contribution limit lifetime buffer

Many RRSP users wait for the last minute or deadline to contribute to their tax-sheltered account and claim tax deductions. But besides the cramming, people worry about exceeding the limit and incurring a penalty. The CRA doesn’t usually broadcast that RRSP users have a cumulative lifetime over-contribution limit of $2,000.

The CRA allows up to a $2,000 maximum over-contribution limit throughout your life.  While you won’t pay a penalty for the lifetime buffer, you can’t claim a tax deduction for the over-contribution.

Eligible investment

You derive passive income from income-producing assets like rental properties and investment instruments. Government investment certificates (GICs), bonds, mutual funds, and stocks are the typical investments held in a TFSA or RRSP. National Bank of Canada (TSX: NA) stock is suitable for your TFSA or RRSP if your financial plan is passive investing with minimal effort.

The $30 billion bank is Canada’s sixth-largest financial institution. Moreover, it’s the only Big Bank stock with a positive gain year to date (+0.34%). If you invest today, the share price is $88.65, while the dividend yield is an attractive 4.6%.

In Q3 fiscal 2023, net income increased 2% to $839 million versus Q3 fiscal 2022. The bottom-line rose despite the higher provision for credit losses of $111 million (+94.7% year over year). NA’s President and CEO, Laurent Ferreira, said, “The Bank’s performance highlights the strength of our strategic positioning in a challenging macroeconomic environment.”

Ferreira adds that NA is well-positioned to navigate continued uncertainty. The region can generate long-term profitable growth because of its high capital levels and constant discipline managing cost and credit. The bank also has strong earnings power.  

Keep money growth tax-free

You can boost or preserve passive income from a TFSA or RRSP if you keep money growth tax-free. Avoid incurring or paying taxes on hidden secrets the CRA is mum about.

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 has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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