The Canada Revenue Agency (CRA) monitors the contributions and available contribution room of each Tax-Free Savings Account (TFSA) account holder. TFSA issuers provide information to the tax agency annually.
Users must follow the governing rules because inappropriate use might prompt the CRA to conduct an audit. To avoid CRA intervention, be mindful of three TFSA mistakes, whether an oversight or otherwise.
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1. Carrying on a Business
The CRA prohibits users from carrying on a business in a TFSA, and income becomes taxable. Engaging in frequent stock trading activities for higher capital gains raises alarm bells. Fast-paced buying and selling of stocks usually involves speculative penny stocks. Day traders try to capture the short-term price fluctuations and profit from them.
Orla Mining (TSX: OLA) is a safer investment option if you’re chasing capital gains. The midcap mining stock trades at $12.71 per share and has delivered enormous returns year-to-date (+59.7%) and in the last 12 months (+158.9%). The overall return in five years is 622.2%-plus. You can earn substantial capital gains from this growth stock without resorting to day trading.
The $4.3 billion company explores mineral properties such as gold, silver, zinc, lead, and copper deposits. Its flagship asset is Camino Rojo in Mexico, a high-quality, operational oxide heap leach mine. Other assets include the South Carlin Complex (Nevada) and Cerro Quema (Panama).
Orla acquired and added Musselwhite Gold Mine in Ontario this month, expanding its footprint in the home country. Expect the total production of this multi-asset intermediate producer to more than double in 2025.
In 2024, net income reached $88.9 million compared to the $27 million net loss in 2023. Free cash flow (FCF) climbed 548% year-over-year to $152.7 million. Jason Simpson, President and CEO of Orla, said, “We intend to continue to invest in growth and exploration across the entire portfolio.”
2. Holding period
A second red flag directly connected to frequent trading or running a business is the period of ownership. TFSA framers introduced a tax-free method to grow investments. However, flipping stocks after a very short holding period could tip off the CRA. Long-term investing will keep the tax agency away.
Diversified Royalty Corporation (TSX: DIV) is a relatively cheap option for long-term investors. At only $2.73 per share, the dividend yield is a generous 9%. Moreover, the small-cap stock pays monthly cash dividends. A $7,000 investment transforms into $52.62 monthly and remains intact.
The $459.7 million company collects royalties from eight established businesses led by Mr. Lube. Other companies in the royalty pool include AIR MILES, Sutton, Mr. Mikes, Nurse Next Door, Oxford Learning Centres, Stratus Building Solutions, and BarBurrito.
3. Overcontribution
Overcontribution is a common and costly mistake. The CRA sets annual contribution limits that require users not to exceed them. While the 1% monthly penalty on the excess limit seems small, it can grow to a significant tax liability if not withdrawn immediately. One user did not heed the CRA’s notice of assessment (NOA) and lost the TFSA overcontribution case.
Enjoy, do not abuse the tax-free benefits
Canadians enjoy tax-free benefits when using the TFSA to save and invest. However, a TFSA user can be charged tax penalties for violating the rules or end up at the tax court. You risk losing the case and the non-waiver of hefty taxes and penalties.
