3 Major Red Flags the CRA Is Watching for Every TFSA Holder

The TFSA is an attractive investing tool to earn tax-free investment income. However, beware of these red flags that could tax your TFSA income.

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Caution, careful

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The Tax-Free Savings Account (TFSA) is one of the most preferred modes of investing by Canadians as it allows tax-free withdrawal of investment income. If someone invested $10,000 after-tax income in Constellation Software 10 years ago through TFSA, the investment would have grown to $85,443 by now. If they want, they can sell their stock and withdraw the entire $85,443 tax-free. However, this benefit comes with conditions.

Three major red flags in TFSA investing

The purpose of the TFSA is to encourage Canadians to save up to a certain amount in qualified investment securities listed on well-known public stock exchanges such as TSX and Nasdaq. The Canada Revenue Agency (CRA) is watching every TFSA holder’s activities in their accounts. Any activity that deviates from the core reason could attract a penalty or taxes.

You can prevent such a scenario by paying attention to three red flags and acting on them before it is too late.

Red flag #1: Exceeding the TFSA contribution limit

Every year, the CRA determines a TFSA contribution limit, which is $7,000 for 2025. Any TFSA withdrawals from last year will be added back to the TFSA contribution room.

If you have any unused limits from the past years, they can be carried forward. If you turned 18 years old in 2009 and were a Canadian resident, your TFSA contribution has been accumulating since then, giving you a consolidated contribution room of $102,000 in 2025. You will get this contribution room even if you did not open a TFSA or file income tax.

You can check your TFSA contribution room on My CRA account. However, it is better to calculate the contribution room as the site may not be updated. The CRA receives all the data by February, which means the January contribution room may not have been updated for any last-minute investments.

If you contribute according to the outdated contribution room, there is a possibility of exceeding the contribution limit. The CRA will impose a 1% penalty on the highest excess contribution in the month. If you realize you have exceeded the limit, immediately withdraw the surplus.

Red flag #2: Trading

TFSA is to encourage a long-term investing approach. The name of the account itself says it’s a savings account. If you use a savings account to trade in stocks, commodities, futures, and options, the CRA could tax you on the income earned from trading.

Remember, frequent contributions, such as $100 a week or $500 a month, do not constitute a trade. A trade is when you both buy and sell a stock more frequently. There is no specific rule on the frequency of investment to be considered as a trade. However, you could consider holding a stock in the TFSA for six months to a year to prevent the possibility of the transaction being classified as trading.

Red flag #3: Investing in crypto and other unqualified investments

Another major red flag is investing in unqualified investments like crypto. Crypto is not a recognized security. However, if you still want to get exposure to the crypto price fluctuation, you could consider buying a crypto exchange-traded fund or Bitcoin mining stocks trading on the TSX or NYSE.

How to invest in TFSA and build wealth in a compliant manner  

A simple preventative solution to avoid the above red flags is to invest small amounts in your TFSA throughout the year, maybe $500 a month or $1,500 per quarter, as per your cash availability. This way, you will have room to invest if an attractive buying opportunity comes. And in a slow market, you could invest in evergreen stocks like Enbridge (TSX:ENB). It is a range-bound stock that gives an average annual dividend growth of 3%.

You can take the dividends from Enbridge and use that money to invest in other growth stocks. This way, you can invest more than the TFSA contribution limit without attracting a penalty. Enbridge stock is trading near its multi-year high, making it a good selling opportunity. If you have been holding this stock for a long time, you could consider selling the stock and use the proceeds to buy a growth stock like Bombardier.

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 Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends Bitcoin, Constellation Software, and Enbridge. The Motley Fool has a disclosure policy.

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