CRA: 1 Big TFSA Mistake Could Land You in Hot Water

A TFSA user can face the wrath of the CRA by committing one grave mistake, which is frequent trading. Instead, invest in the BCE stock and hold it forever.

| More on:
edit CRA taxes

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn moresdf

A much-awaited event is the Canada Revenue Agency‘s (CRA) official announcement of the Tax-Free Savings Account (TFSA) annual contribution limit. The big news for TFSA users in November is the new $6,000 contribution limit for 2021.

The TFSA is a perpetual gift from the federal government to help Canadians secure their financial future and live comfortably in retirement. You can derive a host of benefits, including the non-payment of taxes on all interest, gain, and profit from the account. Funds withdrawn from a TFSA are tax-exempt too.

However, a user must abide by the governing rules and use the TFSA properly. Otherwise, the CRA will exact tax penalties to those who break the rules. One big mistake can land you in hot water.

Don’t operate a business in your TFSA

The CRA will not bother you with taxes unless you over-contribute or have foreign investments in your TFSA. But the agency is unforgiving when you carry on a business. This prohibition pertains to users who are actively trading stocks within the TFSA.

You’re not supposed to conduct frequent trading in the tax-advantaged account. If you do, it will constitute a business. The CRA will treat your earnings as business income and, therefore, taxable income. Don’t think you can get away without penalties because the agency conducts regular audits and cracks down on violators.

Spotting red flags

Heavy traders are easy to spot or identify. Usually, the red flags are trading volume, sometimes pattern, and length or duration of ownership.  Since 2011, the CRA has been conducting TFSA audits. Too much activity in a TFSA will trigger an investigation.

The CRA can file a case in court against an erring TFSA user that runs a de-facto securities trading business. It might be that professional traders are abusing the TFSA, not the average users. The targets are mostly high-value TFSAs.

Tried-and-true

If you hold a tried-and-true dividend stock like BCE (TSX:BCE)(NYSE:BCE) in your TFSA, you don’t need to trade the stock at all. The telco stock is for keeps and a must-own asset for long-term investors or retirees. This $52.21 billion company is the largest telecommunications firm in the land.

Telco stocks are resilient, particular in the COVID world where communications services and the Internet are necessities, not luxuries. BCE trades at $57.72 per share and pays a sector-leading 5.81% dividend. A $65,000 investment today can compound to $201,116.47 in 20 years. The CRA can’t touch even a dollar of your TFSA earnings.

I can give you several compelling reasons why TFSA users should invest in and hold BCE forever. The stock is recession-resistant, while the business model is predictable.As well, the dividend is juicy, and the yield could grow steadily in the years now. The rollout of the 5G network and BCE’s company rural broadband project are the tailwinds.

A grave mistake

Manage your TFSA correctly to enjoy the full perks of the unique investment vehicle. Don’t attempt to purchase stocks for resale at a profit or else face the wrath of the taxman. The CRA assessed roughly $114 million in taxes in the audits between 2009 and 2017 due to one grave mistake.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned.

More on Dividend Stocks

growing plant shoots on stacked coins
Dividend Stocks

5 Dividend Stocks to Buy With Yields Upwards of 5%

These five companies all earn tonnes of cash flow, making them some of the best long-term dividend stocks you can…

Read more »

funds, money, nest egg
Dividend Stocks

TFSA Investors: 3 Stocks to Start Building an Influx of Passive Income

A TFSA is the ideal registered account for passive income, as it doesn't weigh down your tax bill, and any…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

3 of the Safest Dividend Stocks in Canada

Royal Bank of Canada stock is one of the safest TSX dividend stocks to buy. So is CT REIT and…

Read more »

Growing plant shoots on coins
Dividend Stocks

1 of the Top Canadian Growth Stocks to Buy in February 2023

Many top Canadian growth stocks represent strong underlying businesses, healthy financials, and organic growth opportunities.

Read more »

stock research, analyze data
Dividend Stocks

Wherever the Market Goes, I’m Buying These 3 TSX Stocks

Here are three TSX stocks that could outperform irrespective of the market direction.

Read more »

woman data analyze
Dividend Stocks

1 Oversold Dividend Stock (Yielding 6.5%) to Buy This Month

Here's why SmartCentres REIT (TSX:SRU.UN) is one top dividend stock that long-term investors should consider in this current market.

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Dividend Stocks

Better TFSA Buy: Enbridge Stock or Bank of Nova Scotia

Enbridge and Bank of Nova Scotia offer high yields for TFSA investors seeking passive income. Is one stock now undervalued?

Read more »

Golden crown on a red velvet background
Dividend Stocks

2 Top Stocks Just Became Canadian Dividend Aristocrats

These two top Canadian Dividend Aristocrats stocks are reliable companies with impressive long-term growth potential.

Read more »