Tax season is right around the corner, and the Canada Revenue Agency (CRA) does not seem like it will be making life any easier. As much as we do not like it, paying our taxes is a fact of life. The taxes we pay help finance our roads, hospitals, and infrastructure and play a pivotal role in ensuring that all Canadians enjoy reasonable living standards.
However, that does not mean you should pay more taxes than you need to. There are several tax breaks you can take advantage of to reduce your tax bill. The Tax-Free Savings Account (TFSA) has become an invaluable tool for investors to generate a tax-free passive income that the CRA cannot touch.
Unfortunately, TFSA investors often make mistakes that lead to the CRA squeezing more taxes out of them. I will discuss the mistakes you should avoid to keep the CRA’s clutches off of your TFSA income.
1. Over-contributing to TFSA The CRA sets a contribution limit for TFSAs each year. Many investors are too eager to leverage the TFSA’s tax-sheltered status and contribute too much to their accounts. Make sure you are aware of the contribution limit and do not exceed the boundary. Exceeding the contribution limit means that the CRA will charge a 1% tax penalty each month for every dollar over the limit.
2. Trading too much in your TFSA Day trading is absolutely off-limits to TFSAs. It is called the tax-free savings account and not the trading account for that reason. However, this doesn’t stop some day trading enthusiasts from using their TFSAs to make several trades for quick profits.
The CRA conducts random checks on users who abuse this boundary. Frequent trading in your TFSA will capture their attention. If the CRA deems that you are using your TFSA to buy and sell stock for quick gains, the government agency will treat your TFSA earnings as business income. It means that you can count out your TFSA’s tax-sheltered status and allow the CRA to tax you unnecessarily.
3. Foreign dividend income in the wrong account You might have a favorite dividend-paying stock trading across the border. Storing it in your TFSA may make sense because you want to take away earnings from the investment tax-free. The CRA allows TFSA users to store American and other international stocks in their TFSA portfolios.
However, holding foreign dividend income stocks in your TFSA means that there will be taxes on your earnings. The CRA applies a non-resident withholding tax of 15% on dividend income from foreign stocks in TFSAs. If you want truly tax-free dividend income in your TFSA, you should consider investing in a Canadian dividend stock.
Telus Corp. (TSX:T)(NYSE:TU) is an attractive asset to consider for your TFSA if you seek dividend income that is secure, reliable, and virtually guaranteed. Telus is a dominant force in the resilient Canadian telecom sector.
Despite the pandemic, the company reported a strong fourth-quarter performance by adding over 250,000 new customers and growing its revenue by 5.2%. The company is also expanding its fiber-optic broadband network while capitalizing on the 5G network boom across the country.
The overall economic recovery coupled with its recent investments could drive Telus’ financials even higher this year. The company’s management expects its revenues to grow by 8-10% and its adjusted EBITDA by 6-8%.
Foolish takeaway Avoiding TFSA mistakes and taking advantage of uncommon tax credits can help you reduce the overall tax you need to pay the CRA. Telus’ recession-resistant business model, reliable cash flows, and consistent dividends could make it an excellent TFSA pick that can help you reduce your tax bills this year.
The post Caution: 3 Ways the CRA Could Squeeze More Taxes Out of You! appeared first on The Motley Fool Canada.
Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends TELUS CORPORATION.
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