🥇 First rule of investing? Know when to save! Up to 55% off InvestingPro before BLACK FRIDAYCLAIM SALE

3 Huge TFSA Mistakes to Avoid If You Don’t Want to Pay Taxes to the CRA

Published 2021-03-19, 08:46 a/m
© Reuters.  3 Huge TFSA Mistakes to Avoid If You Don’t Want to Pay Taxes to the CRA

Some Tax-Free Savings Account (TFSA) users might not know that there’s a TFSA return. In most TFSA situations, you don’t incur tax payables whatsoever. However, the Canada Revenue Agency (CRA) requires users to file a TFSA return by June 30 of every year in certain circumstances.

TFSA contributions are not deductible for income tax purposes. However, your contributions and all interest, capital gains, and investment income earned in the account are generally tax-free. Even withdrawals, regardless of amount, are not subject to tax.

The advice to users is not to commit three mistakes that would lead to one or more taxes with respect to a TFSA. All are costly blunders. Hence, it’s always the user’s lookout to be free of the CRA.

1. Over-contribution The CRA set annual TFSA limits, and the rule is crystal clear. Don’t over-contribute. If you do, the penalty tax is 1% of the excess contribution per month. The contribution limit for 2021 is $6,000. You can’t go beyond it unless you have an unused contribution room from 2020. The sum of both becomes the available contribution room.

2. Foreign investments Since Canada’s Income Tax Act no longer imposes a cap on foreign investments in a TFSA, users can diversify to include international stocks. The CRA allows it as long as your chosen stock trades on major stock exchanges. Unfortunately, it’s not the best strategy if tax is your concern.

The complication arises when you collect dividends. There’s a corresponding 15% withholding tax on foreign dividends. Furthermore, the money isn’t recoverable because it’s also not deductible on your tax return. You’ll not realize the desired income from a high-yield foreign dividend stock.

3. Day trading Don’t toy with the idea to buy and sell stocks in your TFSA to make quick bucks or derive outsized gains. Frequent trading is what day traders do. But the CRA strictly prohibits users from carrying on a business in their TFSAs. If the tax agency catches you during audits, it will treat your income as business income, and therefore, taxable. The CRA sometimes charges violators in court.

Rich enterprising legacy The North West Company (TSX:NWC) trades only on the TSX, but it packs a mean dividend yield. Its business model is likewise recession-resistant and could endure economic downturns. This $1.71 billion multinational grocery and retail company rule in underserved rural communities and urban neighborhood markets.

It operates a near-monopoly in the hard-to-reach areas in Canada. It also caters to customers in Alaska, the South Pacific, and the Caribbean. Management has yet to report the full-year 2020 results, although the showing in Q3 2020 (quarter ended October 31, 2020) was already stellar.

On record, the North West Company is one of the longest continuing retail enterprises in the world. It has built a rich enterprising legacy that dates back to 1668. Besides adapting its product mix to each market, the company has the logistics expertise to move the products.

You can purchase this consumer-defensive stock today at $35.14 per share. With a dividend offer of 4.16%, you can boost your tax-free income.

Pointless expenses Penalty taxes are pointless expenses, especially in a TFSA. The CRA won’t hound users who avoid the three mistakes. Pick the right dividend stock and let your money grow the tax-free way.

The post 3 Huge TFSA Mistakes to Avoid If You Don’t Want to Pay Taxes to the CRA appeared first on The Motley Fool Canada.

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

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Motley Fool Canada 2021

This Article Was First Published on The Motley Fool

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.