With the CRA Watching, Here's What TFSA Holders Need to Know

With the CRA Watching, Here’s What TFSA Holders Need to Know

If you want stable income coming out of your TFSA, stay away from CRA red flags. Latch onto these two stocks instead.

Amy Legate-Wolfe

Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Before joining Motley Fool Canada, she wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote: “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published February 19, 2025 3:30 pm EST

| More on: BIP.UNTOI

The Canada Revenue Agency (CRA) keeps a close eye on Tax-Free Savings Accounts (TFSAs), especially when account holders engage in activities that resemble business operations. While TFSAs are meant for long-term investing, some investors get caught up in frequent trading, which can raise red flags. The CRA has made it clear that using a TFSA as a short-term trading account can result in taxation. So, the best way to avoid trouble is to adopt a buy-and-hold strategy with solid mid-cap stocks that offer stability and growth. Two stocks that fit this profile well are Brookfield Infrastructure Partners (TSX:BIP.UN) and Topicus.com (TSXV:TOI).

Blocks conceptualizing Canada's Tax Free Savings Account — Source: Getty Images

BIP

Brookfield Infrastructure Partners is a globally diversified infrastructure company. It owns and operates essential assets across utilities, transport, midstream, and data sectors. This diversification helps insulate it from economic downturns while providing steady cash flow.

Over the years, BIP.UN has proven itself as a resilient investment. Appealing to those looking for a mix of dividend income and capital appreciation. In its most recent earnings report, Brookfield Infrastructure posted a net income attributable to the partnership of $391 million — a strong performance reflecting its ability to manage assets efficiently. The company’s focus on acquiring and optimizing high-quality infrastructure assets has positioned it as a long-term winner in the industry. For TFSA investors, this means a reliable stock that can generate steady returns without the kind of frequent trading that might attract the CRA’s attention.

Topicus

Another stock worth considering is Topicus.com, a European-based software company that specializes in vertical market software and platforms. Unlike high-flying tech stocks that thrive on hype, Topicus.com focuses on steady, profitable growth by acquiring and integrating niche software businesses.

In its latest earnings release, the company reported revenues of €312.2 million, marking a 12% year-over-year increase. This growth is driven by its ability to find, acquire, and enhance businesses within its target markets. Topicus.com operates under a strategy similar to its former parent company, Constellation Software. This stock has built a reputation for disciplined capital allocation and long-term profitability. With a strong track record of integrating acquisitions and expanding its market reach, Topicus.com offers investors a compelling way to gain exposure to the tech sector without the volatility associated with more speculative stocks.

Fly under the radar

For TFSA investors, the key to staying on the right side of the CRA is avoiding frequent buying and selling. The CRA has been known to audit TFSAs that generate unusually high levels of trading activity, as it may interpret this as running a business rather than simply investing.

While the CRA has not provided an exact threshold for what constitutes “too much trading,” cases in the past have shown that making dozens or even hundreds of trades per year can raise red flags. The safest approach is to invest in high-quality companies with strong fundamentals and hold onto them for the long term.

Brookfield Infrastructure Partners and Topicus.com both fit the criteria of strong long-term investments that don’t require constant buying and selling. Both stocks have delivered solid performance over the past few years and are well-positioned for continued growth, making them ideal holdings for a tax-free account.

Another important factor to consider is dividends. Brookfield Infrastructure Partners offers a healthy dividend yield of nearly 5%, which is a great advantage for TFSA investors who want to generate passive income. The best part is that dividends earned within a TFSA remain completely tax-free, so investors can reinvest them or withdraw them without worrying about additional tax implications.

Bottom line

For TFSA holders, the combination of BIP.UN’s steady income and Topicus.com’s growth potential make for a well-balanced strategy. By holding onto these stocks rather than engaging in high-frequency trading, investors can maximize their tax-free returns while staying compliant with CRA regulations. The key takeaway is that a TFSA should be treated as a long-term investment vehicle rather than a trading account. By focusing on companies with strong fundamentals and predictable cash flows, TFSA holders can enjoy the full benefits of tax-free investing while keeping their accounts in good standing.