Keep Your TFSA Safe (and the CRA Happy) by Avoiding These Triggers

TFSA users can safely earn tax-free income by avoiding actions that attract the CRA’s attention.

| More on:
protect, safe, trust

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 a powerful savings tool for Canadians. Its most appealing feature is that all earnings and investment income inside the account are tax-free. The Canada Revenue Agency (CRA) has set rules for TFSA users. Violators risk an audit by the tax agency and, in some cases, pay unnecessary penalty taxes.

If you want to keep your TFSA safe, avoid the common triggers that attract the CRA’s attention. When the taxman confirms the violation, a notice of assessment (NOA) will appear on your CRA My Account, and a notification will be sent via e-mail. Take the NOA seriously because it might be too late to waive penalty charges if there are any.

Over-contribution

The common mistake of TFSA users is over-contribution. This error, an oversight or deliberate, comes with a 1% penalty per month for each month you’re over the limit. Should the CRA find your waiver request reasonable, it can cancel the penalty provided you withdraw the over-contribution promptly or “without delay.” Sometimes, this nuisance reaches the federal court for resolution by a judge.

Not tracking contribution room

Always keep track of your contributions, available contribution room, and withdrawals. Withdrawals are tax-free, and funds you take out will not reduce the total contributions for the year. However, you can’t return the withdrawn money in the same year if you’ve maxed out the limit.

Inversely, unused contribution rooms carry over to the following year. Assuming your unused room in 2024 is $3,000, and the 2025 contribution limit is $7,000, your available contribution room becomes $10,000.

The big no-no

The CRA is strict when TFSA users carry a business instead of actually saving and investing. Frequent stock trading is the trigger in this instance. The Federal Court of Appeal has ruled that active trading of marketable securities constitutes a business, and the CRA can impose the corresponding taxes on business income.

While stocks are qualified investments, you can’t bend the rules. The tax agency can detect stock traders masquerading as TFSA users. It monitors the frequency of transactions, volume, and holding period to determine whether you buy and sell stocks to boost profit.

Be problem-free

TFSA uses can be problem-free by adhering to the rules. If dividend investing is your route to meet short and long-term financial goals, make Canadian Utilities (TSX:CU) your anchor stock. The utility stock is TSX’s first Dividend King. It has raised its dividend for 52 consecutive years (50 is the minimum requirement).

Created with Highcharts 11.4.3Canadian Utilities PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.ca

If you invest today ($34.47 per share), the dividend yield is 5.27%. The $9.36 billion utility and energy infrastructure company generate steady growth and consistent profitability because of its essential services. Canadian Utilities’s dividend growth foundation stems from the highly contracted and regulated earnings base.

Management said the planned $4.6 billion to $5 billion investment in regulated utilities from 2024 to 2026 would increase earnings and enhance long-term shareholder value. CU is tradeable, but no TFSA investors will do so because the Dividend King is for keeps.

Should you invest $1,000 in Brookfield Asset Management right now?

Before you buy stock in Brookfield Asset Management, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Brookfield Asset Management wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

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.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Investing

Stocks for Beginners

Dip Buyers Could Win Big: The Best Canadian Stocks to Buy Now

These two growth stocks have taken hits recently, but their fundamentals remain strong, and their growth prospects are intact.

Read more »

A bull and bear face off.
Stock Market

Bear Market Bargains Emerge as Recession Stocks Return

If you want a deal, then go to the best stocks during a recession market dip.

Read more »

Canadian Red maple leaves seamless wallpaper pattern
Dividend Stocks

5 Canadian Dividend Stocks to Buy and Hold for the Next 20 Years

These Canadian stocks have paid dividends for decades, making them reliable investments to generate regular passive income.

Read more »

An investor uses a tablet
Stocks for Beginners

The Smartest Canadian Stock to Buy With $250 Right Now

Are you looking for the smartest Canadian stock to buy right now? Consider this gem and avoid market volatility.

Read more »

Dividend Stocks

3 Canadian REIT Stocks to Buy and Hold for the Next Quarter-Century

These three Canadian REITs trade cheaply and are highly reliable, making them some of the best stocks you can buy…

Read more »

Electricity transmission towers with orange glowing wires against night sky
Investing

Fortis Just Might Be the Best Canadian Dividend Stock to Buy in April

Let's dive into a few reasons why Canadian utility giant Fortis (TSX:FTS) still looks like a screaming buy heading into…

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Dividend Stocks

1 Practically Perfect Canadian Stock Down 24% to Buy Now and Hold for Life!

CNR stock is a top Canadian stock for investors, especially with shares down on the TSX today.

Read more »

a man relaxes with his feet on a pile of books
Investing

Got $7,000? How I’d Spread It Across 5 Blue-Chip Stocks for an Investing Foundation

Spreading $7,000 across these five blue-chip stocks provides a solid foundation for long-term financial success.

Read more »