How to Earn Big TFSA Income the Canada Revenue Agency Can’t Tax

Did you know that some mistakes can lead to you forfeiting your TFSA account’s tax-free status? Here’s how to avoid them while investing in stocks like the Toronto-Dominion Bank (TSX:TD).

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Blocks conceptualizing Canada's Tax Free Savings Account

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Do you want to earn tax-free savings account (TFSA) income that the Canada Revenue Agency can’t tax?

It’s not the hardest thing in the world to do, but there are some mistakes that can lead to you forfeiting your account’s tax-free status.

Over-contributing, holding private business shares in a TFSA, and day trading are all big “no-nos” that have caused Canadians to give up the tax-free status of their TFSA assets. In this article, I’ll provide some guidance as to how you can avoid their fate.

Invest long term

Investing long term in large Canadian companies and ETFs is a great way to avoid the most common TFSA pitfalls. The “long-term” part of the previous sentence spares you the fate of being a TFSA day trader, while the “large” part saves you from holding companies you control in your TFSA. If you hold Canadian blue chips and ETFs long term, you’re probably not a day trader, and you’re probably not trying to stash your personal side hustle in your TFSA. That’s two major sources of TFSA taxation taken off the table right there.

Now, there’s one source of TFSA taxation my suggestion doesn’t spare you:

Over-contribution of taxes.

These are taxes you pay if you contribute more than your limit. Your limit is based on how many years of contribution room have been added since you turned 18, and how much those yearly limits were. If you turned 18 this year, you have $7,000 in contribution room. If you turned 18 in 1991 or earlier, you have $95,000 in contribution room. Assuming, that is, that you haven’t made contributions already. Contribute within your limit, and you won’t be taxed. If you don’t know what your limit is, you might be able to find it on CRA MyAccount.

Examples of TFSA assets I’ve invested in

Having shared how to keep your TFSA’s tax benefits, it’s time to move on to some investment ideas. I figure I’ll just share what I have in my personal TFSA here.

One example of a stock I hold in my TFSA is The Toronto-Dominion Bank (TSX:TD). TD is Canada’s second-biggest bank by market cap. I owned it for a long time, sold it in the mid-80s, then bought the shares back for prices averaging about $76 during the recent money laundering scare.

Created with Highcharts 11.4.3Toronto-Dominion Bank PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.ca

If you’re not sure which money laundering scandal I’m referring to: TD Bank employees in New Jersey were caught laundering money for drug cartels back in 2022. This got TD’s First Horizon deal cancelled. Later, TD Bank tellers in New York and Florida were caught doing similar things. The resulting money laundering investigation resulted in TD booking $615 million related to expected fines last quarter.

Now obviously, all of the above is bad in itself. However, TD Bank stock got very cheap because of it. As a result, I was able to re-enter at about a 5.5% average yield.

Another portfolio holding of mine is the iShares S&P TSX 60 Index Fund (TSX:XIU). It’s a diversified Canadian index fund that charges just a 0.12% management fee. Such a fee is so small you probably won’t notice it. It’s certainly smaller than the 3% dividend the fund should pay this year, if this year looks like last year. On the whole, I’m very comfortable having the XIU ETF in my portfolio. Cheap, diversified and relatively high-yield, it’s a perfect antidote to today’s pricey U.S. markets.

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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 Andrew Button has positions in Toronto-Dominion Bank and the iShares S&P/TSX 60 Index ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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