The Tax-Free Savings Account (TFSA) has numerous benefits, but rules are in place especially concerning account balances. Some people are hurrying to make more since money growth is tax-free in a TFSA.
However, the Canada Revenue Agency (CRA) is watching. Alarm bells ring when you abuse your privileges, whether knowingly or unknowingly. Avoid three TFSA red flags as much as possible or risk paying penalties.
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1. Over-contribution
The new TFSA dollar limit in 2025 is $7,000; since 2009, you can’t contribute more than the allowable limit. An infraction results in a 1% tax per month on the excess amount until withdrawn. Assuming you don’t max out your yearly limits, you can only contribute up to your available contribution room.
2. Multiple TFSA
An eligible person (18 years old and above) can open more than one TFSA. Unfortunately, it doesn’t mean your limit in 2025 doubles to $14,000 if you have two accounts. You must work around the same annual and lifetime contribution limits subject to the CRA rules. Also, transferring money from one account to another counts as a TFSA contribution.
3. Aggressive stock trading
Many TFSA users prefer to hold stocks because of the higher earning potential. However, the golden rule with stocks is that you can’t make it a business or be like a day trader. If you trade full-time (aggressively and high-frequency) using your TFSA, the CRA will treat your earnings as “taxable” business income.
Maximize return on investment
TFSA investors can maximize return on investments by sticking to the rules. If the objective is to meet short- or long-term financial goals, Héroux-Devtek (TSX: HRX) and Doman Building Materials (TSX: DBM) are sound choices in November.
Capital gains
Héroux-Devtek is a non-dividend payer but a high-growth stock. At $31.77 per share, the year-to-date gain is 109%. If you had invested $7,000 at year-end 2023, your money would have been $14,630.92 today. The industrial stock will likely sustain its upward momentum, given the latest quarterly results.
The $1.08 billion company operates in the aerospace & defence industry, supplying landing gears, actuation systems, and related companies to clients in North America. In the third quarter (Q3) of 2024, sales and net income increased 22.4% and 115.2% to $173.2 million and $9.9 million compared to Q3 2023.
With defence spending increasing in the U.S., its top market, Héroux-Devtek expects increased sales to defence and commercial sectors in the coming quarters.
Passive income
Doman Building Materials sees improving market conditions due to lower volatility. Its board chairman, Amar S. Doman, said, “We are encouraged by some positive indicators with pricing firming up and steadier activity in our key markets.” The $824 million company supplies building materials and construction lumber in North America.
Despite reduced earnings in Q3 2024 versus Q3 2023, the stock is up nearly 23% year to date. If you invest today, the share price is $9.65, while the dividend yield is 5.93%. A $7,000 investment converts into a $415.10 annual tax-free income in a TFSA. The price weakness is temporary, and DBM has been paying quarterly dividends since 2012.
No CRA interference
TFSA balances grow with regular contributions and income-producing assets. Remember, if you manage your account correctly, the CRA will not interfere or charge unnecessary penalties.
