The Canadian government introduced the Tax-Free Savings Account (TFSA) in 2009, and some who were 18 years old and eligible to open an account then could be millionaires today. Yes, the one-of-a-kind investment account can help a user build wealth.
However, TFSA investors who achieved the feat did one thing right. They prevented the Canada Revenue Agency (CRA) from getting in the way because they followed the rules. Specific actions or activities related to the TFSA raise alarm bells. The taxman will intervene and impose penalty taxes if you fall into these CRA traps.
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Stay within the contribution room
The CRA sets the TFSA contribution limit (indexed to inflation). For 2025, the limit is $7,000. Any unused contribution room in 2024 adds to the new annual limit. Assuming you have $3,000 left from last year, you can only contribute $10,000 this year.
The corresponding penalty is 1% of the excess or over-contribution multiplied by the number of months it is in your account during the calendar year. Your remedy is to withdraw the amount as soon as possible.
Don’t return withdrawn funds
TFSA withdrawals are tax-free, although if you return the money in the same year, you will be penalized for over-contribution. Remember that the amount you take out becomes an unused contribution room and is available the following year.
Forbidden action
The CRA frowns on overzealous users who use the TFSA to make quick bucks. Frequent trading of marketable securities, particularly stocks, constitutes a business. Income derived from this forbidden action or day trading becomes business income and is subject to regular taxation.
TFSA investors abiding by CRA rules should be problem-free and earn tax-free income 100% of the time. The secret of millionaire accountholders is consistent, regular contributions (max the annual limit if possible).
Dividend gems
A relatively cheap but profitable option in 2025 is PHX Energy Services (TSX:PHX). At $9.57 per share, the dividend yield is a generous 8.36%. Given the quarterly payout frequency, a $7,000 investment transforms into a recurring income of $146.30 every three months. Market analysts see a 25% average upside in 12 months ($12).
The $436.3 million company provides horizontal and directional drilling services to oil and gas industry clients. In the first three quarters of 2024, earnings declined 38% year over year to $40.5 million due to lower rig count. For 2025, management expects its fleet of “measurement while drilling” (MWD) tools to drive growth.
Another dividend gem and money-maker is Nexus Industrial (TSX:NXR.UN). The property portfolio of this $727.85 million real estate investment trust (REIT) across Canada is predominantly institutional-quality industrial properties. Management maintains a favourable outlook in 2025 due to positive market rental fundamentals.
In the first three quarters of 2024, property revenue and net operating income increased by an identical 13.3% year over year to $131 million and $93.7 million. If you invest today, this pure-play industrial REIT trades at $7.73 per share and pays a hefty 8.28% dividend.
Costly mistakes
The CRA traps mentioned above are costly if users fall into them. Your millionaire dream could vanish by mismanaging your TFSA.
