When it comes to taxes, the Canadian investor has no better friend than a tax-free savings account (TFSA). Letting you shelter your gains and dividends from taxation, while inside the account and on withdrawal, the TFSA can boost your after-tax returns.
That’s not to say that TFSAs are always completely tax-free however. You do pay withholding taxes on foreign dividend stocks in a TFSA, for example. Additionally, there are specific scenarios where you can end up paying taxes to the CRA – specifically when you violate the TFSA account rules. In this article, I will explore three TFSA red flags that the CRA is keeping a close eye on, that you should never allow yourself to be exposed to.
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Excessive contributions
Contributing past your limit is the most obvious TFSA red flag that the CRA keeps a close watch on. Every investor has accumulated a certain amount of contribution room. The formula is amount of room added in each year in which you were eligible to open an account, minus past contributions. If you contribute more than this amount, then you could wind up getting taxed for excessive contributions.
A common TFSA contribution room misconception is that total contribution room is the same for everybody. The mistake people make here is conflating the amount of contribution room accumulated since the TFSA launched, with personal contribution room. Only those who were 18 or older in 2009 get the TFSA program’s lifetime accumulated amount, which is $102,000 for 2025. If you were 17 or younger in 2009, you have less lifetime accumulated room than that.
Unapproved investments
A second ‘red flag’ category the CRA keeps a close eye on is unapproved investments. There are a few of these, most of them involving holding shares in a company you control in a TFSA. If you create securities representing ownership in your small business and deposit them into your TFSA, you will be taxed. The CRA does not regard such shareholdings as investments but as business assets.
Fortunately, 90% of Canadians are not at risk of ever falling into the unapproved investment trap. If you’re a business owner, you might want to keep it in mind.
Day trading
Last but not least, we have full-time day trading. If you day trade full time and realize huge profits by doing so, the CRA will tax you as a business, even if you conducted your trades in a TFSA. There is a bit of a grey area when it comes to defining day trading, but suffice it to say, if you trade full time, earn a full-time living, and use specialized software in your trading, the CRA will probably consider you a business.
It’s better to hold index funds in your TFSA long term than to day trade in it. Such funds are usually considered legitimate TFSA holdings. Consider The Vanguard S&P 500 Index Fund (TSX: VFV), for example. It’s a Canadian index fund built on U.S. stocks. Specifically, it is built on the S&P 500, the world’s most followed stock market index. The fund has 500 or so stocks, which provide it with considerable diversification. It has a low management fee (0.08%), which means it is fairly cheap. Finally, the fund is liquid and widely traded, which results in low trade execution costs. Overall, it’s an asset worth holding, and it is 100% approved for your TFSA.
