The best use of a Tax-Free Savings Account (TFSA) happens when you invest in growth stocks for the long term. Capital gains taxes reduce investment income from stock sales. However, investing through the TFSA can help you avoid capital gains taxes, thanks to its special tax treatment. That’s why this account needs growth stocks that you can buy and hold for life to maximize your capital gains.
Two Canadian stocks to buy and hold in TFSA
The TFSA contribution is limited for each individual. Don’t lose this tax benefit to speculative stocks with a high risk of a downturn. Instead, consider investing in stocks that you know will deliver great returns over the long term.
Descartes Systems Stock
Descartes Systems (TSX:DSG) shares fell to a 52-week low due to the impact of tariffs on trading volume. The stock was overvalued at the start of the year, but the dip has corrected the valuation from a forward price-to-earnings ratio of 51 in January 2025 to 27 now.
This is an opportunity to buy this fundamentally strong stock and hold it for life. Consider this the low point of the rate drop. The market has absorbed the uncertainty associated with the trade negotiations. Countries are now looking for alternatives with new government policies worldwide, shifting to a new global supply chain.
The shift in the supply chain will open up new opportunities for Descartes in transportation management, routing, customs and regulatory compliance. The company has recovered from the 2016 oil crisis, the 2018 US-China trade war, and the 2020 pandemic. In each crisis, the company recovered with stronger sales growth and higher adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
That’s because trade became complex and Descartes introduced new solutions to address these complexities. This time, the company has cut costs to maintain its EBITDA amid low trading volumes. In the meantime, it has acquired companies for their technology and presence. As trading volume increases, Descartes could see an increase in demand, which will later be reflected in the stock price.
Topicus.com
Topicus.com (TSXV:TOI) is another growth stock that fell 17% last month, wiping out its second-quarter seasonal rally. Behind the dip lies the sudden resignation of Mark Leonard, the founder of the parent company Constellation software. This management change is important for a holding company like Topicus.com because the composite model it follows and efficiently implements is due to the skill of its management. Choosing the right company and valuation for acquisition and deriving value from it is a human skill.
However, the team that manages and runs Topicus.com remains intact. So you could see a revival in the company’s stock price in the medium term as investors absorb the management change at Constellation. All eyes will be on the upcoming quarterly results as investors assess the impact of management changes on earnings.
The latest dip has significantly reduced the value of Topicus.com’s shares to a price-to-earnings ratio of 35 times, the lowest in five quarters. This is a good time to buy the stock because the earnings per share of the acquired companies will boost earnings per share and free cash flow, propelling the stock to recovery.
Important note for TFSA holders
If you make a profit from time to time and withdraw that amount from your TFSA, your TFSA contribution room will increase by that amount next year. So if you withdrew $5,000 from a TFSA for some reason in 2024, your 2025 contribution will grow by $5,000, on top of the $7,000 limit added in 2025.
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