The Tax-Free Savings Account (TFSA) is a powerful savings tool for Canadians. Its most appealing feature is that all earnings and investment income inside the account are tax-free. The Canada Revenue Agency (CRA) has set rules for TFSA users. Violators risk an audit by the tax agency and, in some cases, pay unnecessary penalty taxes.
If you want to keep your TFSA safe, avoid the common triggers that attract the CRA’s attention. When the taxman confirms the violation, a notice of assessment (NOA) will appear on your CRA My Account, and a notification will be sent via e-mail. Take the NOA seriously because it might be too late to waive penalty charges if there are any.
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Over-contribution
The common mistake of TFSA users is over-contribution. This error, an oversight or deliberate, comes with a 1% penalty per month for each month you’re over the limit. Should the CRA find your waiver request reasonable, it can cancel the penalty provided you withdraw the over-contribution promptly or “without delay.” Sometimes, this nuisance reaches the federal court for resolution by a judge.
Not tracking contribution room
Always keep track of your contributions, available contribution room, and withdrawals. Withdrawals are tax-free, and funds you take out will not reduce the total contributions for the year. However, you can’t return the withdrawn money in the same year if you’ve maxed out the limit.
Inversely, unused contribution rooms carry over to the following year. Assuming your unused room in 2024 is $3,000, and the 2025 contribution limit is $7,000, your available contribution room becomes $10,000.
The big no-no
The CRA is strict when TFSA users carry a business instead of actually saving and investing. Frequent stock trading is the trigger in this instance. The Federal Court of Appeal has ruled that active trading of marketable securities constitutes a business, and the CRA can impose the corresponding taxes on business income.
While stocks are qualified investments, you can’t bend the rules. The tax agency can detect stock traders masquerading as TFSA users. It monitors the frequency of transactions, volume, and holding period to determine whether you buy and sell stocks to boost profit.
Be problem-free
TFSA uses can be problem-free by adhering to the rules. If dividend investing is your route to meet short and long-term financial goals, make Canadian Utilities (TSX:CU) your anchor stock. The utility stock is TSX’s first Dividend King. It has raised its dividend for 52 consecutive years (50 is the minimum requirement).
If you invest today ($34.47 per share), the dividend yield is 5.27%. The $9.36 billion utility and energy infrastructure company generate steady growth and consistent profitability because of its essential services. Canadian Utilities’s dividend growth foundation stems from the highly contracted and regulated earnings base.
Management said the planned $4.6 billion to $5 billion investment in regulated utilities from 2024 to 2026 would increase earnings and enhance long-term shareholder value. CU is tradeable, but no TFSA investors will do so because the Dividend King is for keeps.
