Canadians can become rich through the TFSA because money growth is tax-free and contribution rooms are growing. The Canada Revenue Agency (CRA) sets the yearly contribution limit, and unused contribution rooms carry over to the following year.
However, the tax agency is watching to ensure users do not misuse, abuse or violate the rules. Certain activities raise alarm bells and trigger a CRA audit and assessment. The result could be costly penalties and tax payments.
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Frequent trading
Frequent trading of marketable securities, particularly stocks, goes against the objectives of the TFSA. The CRA can determine if a user is conducting a stock trading business. In addition to the frequency of transactions, the tax agency looks at the holding period. Active or day trading for a profit constitutes a business; therefore, the income becomes taxable.
Speculative investments
A 2023 case the Federal Court of Appeal decided in favour of the CRA involves the frequent trading of penny stocks. The short holding period of a speculative investment showed the real intent of the TFSA user. Thus, the court affirmed the tax due from the business income.
TFSA investors can invest in non-dividend paying stocks with growth potential but not speculative. For example, MDA Space (TSX:MDA) has delivered hefty returns (+152%) in the last 12 months. Had you invested $7,000 in the industrial stock one year ago, your money would be $17,668.45 today.
The $3.33 billion space technology company operates in the global space industry, providing robotics, satellite systems, and geo-intelligence solutions. MDA Space is at the front and center of the rapidly growing space economy. Management expects business growth from space companies, prime contractors, and government agencies.
Its chief executive officer (CEO), Mike Greenley, said that MDA has good revenue visibility given the $4.6 billion backlog (49% year-over-year increase) at the end of the third quarter (Q3) of 2024. In the three months ending September 30, 2024, revenues and adjusted net income rose 38% and 59.9% to $282.4 million and $34.7 million compared to Q3 2023.
With its diverse technology offerings and a significant growth pipeline, MDA is well-positioned to capitalize on strong customer demand and robust market activity. If you invest today, the share price is $28.32. Market analysts’ 12-month average price target is $33.12 (+17% upside potential).
Significant balance growth
A significant TFSA balance growth attracts attention and is related to frequent trading and speculative investments. However, the CRA will not intervene if a user does not engage in active trading but earns two ways from a TSX stock.
Enerflex (TSX:EFX) deliver capital gains and dividend income to TFSA investors. At $14.97 per share, investors enjoy a +124.29% one-year price return on top of the 1.33% dividend yield. The $1.86 billion company provides energy infrastructure and energy transition solutions globally.
Its President and CEO, Marc Rossiter, said Enerflex is a strong, resilient company positioned for sustainable growth and value creation. Management’s priority is to provide meaningful direct shareholder returns. Enerflex has a strong operational visibility, evidenced by the combined $2.9 billion backlog from two core business lines.
Audit candidate
Your TFSA is a candidate for audit if you conduct business-like activities in the account. The CRA will act promptly to penalize or collect taxes from erring accountholders.
