Every so often, I hear from readers who assume I’m going to tear apart their stock picks when they ask for feedback. But this isn’t about whether or not you choose the right stock.
It’s about avoiding easy-to-fix mistakes that can quietly cost you money. Most are about knowing the tax rules, account types, and little traps in the Canadian investing landscape. Here are three to watch out for.
TFSA withholding tax
One of the most common oversights I see is holding U.S. stocks or ETFs in a Tax-Free Savings Account (TFSA). While the TFSA shelters you from Canadian taxes on gains and income, it doesn’t stop the U.S. from withholding 15% of any dividends paid. You can’t claim a foreign tax credit to recover that amount in a TFSA, so the money is just gone.
If you’re investing in U.S. dividend payers, you’re better off holding them in a Registered Retirement Savings Plan (RRSP), where that withholding is waived under the Canada-U.S. tax treaty. In a TFSA, sticking to Canadian or non-dividend-paying U.S. stocks can help you avoid this leak.
REITs in taxable accounts
Another expensive slip-up is holding real estate investment trusts (REITs) in a taxable account. REIT payouts are often a messy mix of regular income, capital gains, and return of capital, with the regular income portion taxed at your full marginal rate. That can be much higher than the tax on eligible Canadian dividends or capital gains.
If you like REITs for their yield, keep them in a TFSA or RRSP where the income isn’t taxed annually. In a taxable account, you could be giving away a chunk of your return every year to the CRA.
Penny stocks in registered accounts
Finally, there’s the issue of penny stocks in registered accounts. If a speculative pick goes to zero in a TFSA or RRSP, you can’t claim a capital loss to offset other gains. That loss room is just gone, and unlike in a taxable account, you can’t carry it forward to use in future years.
It’s one thing to take a calculated swing on a small-cap or high-risk name, but if you’re doing it inside a registered account, you’re losing the ability to at least get some tax value back if it fails. For most investors, speculative bets are better left in taxable accounts where losses can serve some purpose if things go south.
The Foolish takeaway
Don’t panic if you’ve been making one of these mistakes. They’re easy to fix and won’t sink your portfolio on their own. The key is to optimize where you hold certain investments so you keep more of what you earn. A quick account shuffle can save you from unnecessary taxes and missed deductions, letting your returns compound more efficiently over time.
