The Tax Free-Saving Account (TFSA) can be your treasure chest, hidden from the tax hands of the Canada Revenue Agency (CRA). However, there are certain rules to protect your assets. Remember, the CRA is monitoring your financial transactions. The tax consequences will not be felt immediately after the transaction, but during tax filing at the end of the year, and the penalty will be greater than the reward. Instead of living in fear of tax liability and not investing in a TFSA at all, learn the rules of the game and unlock a million-dollar tax-free opportunity.
What TFSA holders need to know
TFSA withdrawals are tax-free. The best way to use it is to save it for larger withdrawals in years when your tax bill is high.
The CRA monitors your withdrawals through the TFSA
For example, Mary used up all of her previous TFSA contribution room and added a new TFSA contribution limit of $7,000 in 2026. She keeps making small withdrawals of $300-$400 and loses track of how much she has withdrawn. She will have to wait until next year for the withdrawn amount to be added to her TFSA contribution room. She will receive her $20,000 annual bonus in mid-2026, which she will invest in the TFSA without checking her contribution room. She ended up over-contributing $13,000.
Here’s a catch. Sometimes the CRA website may not be updated with your actual TFSA contribution room until the Agency receives the information from financial institutions. The delay may give you outdated information about the contribution space. If you withdraw money regularly, you may be contributing too much.
The overpayment penalty is 1% per month on the overpayment amount. In Mary’s case, she pays $130 (1% of $13,000) for each month. Because the CRA doesn’t immediately charge a tax debt, she may end up piling up the $130 penalty for months before realizing she overpaid.
Therefore, keep track of your withdrawal and contribution space using the Form RC343 worksheet and the publisher’s statements to avoid penalties.
The CRA keeps an eye on your TFSA investments
The CRA also keeps an eye on your TFSA investments, as the tax benefit only applies to qualified investments and investment activities. For example, direct investments in real estate, private company shares, and cryptocurrencies do not qualify as TFSA investments because they are not regulated by the market.
Listed stocks, mutual funds, exchange-traded funds, bonds and other similar instruments are eligible. Please note that dividends on foreign shares may be subject to withholding tax. While you are purchasing qualified investment vehicles, there is another rule that can disqualify your investments. Trading in a TFSA is not permitted. If you buy and sell shares too often, with a holding period of a few days instead of months, you could end up under CRA supervision. Keep in mind that investing $100 a week to buy certain stocks doesn’t count as trading because you don’t sell them that often.
There is no specific rule around frequency, but holding shares for at least a few months can avoid unwanted attention.
Here’s an ideal TFSA investment that you can buy and hold forever.
Constellation software
Constellation software (TSX:CSU) Shares are down 14% so far in 2026, extending the dip since July 2025 to 43%. However, the company’s financial statements do not support this dip. It continues to deploy capital to acquire vertical-specific software (VSS) companies.
There are fears that software code written by artificial intelligence (AI) will make VSS companies less valuable. Constellation acquires companies whose software is niche and entails high switching costs. We can’t say how AI will change the software landscape, but Constellation’s engineering talent and management are also adapting to the change.
Founder Mark Leonard has resigned for health reasons, but his replacement, Mark Miller, is also a 30-year veteran of Constellation. Although there will be a change in management style, the culture and formula will remain the same. These factors can slow or accelerate the compound effect if the management transition goes smoothly. This risk is worth taking because the rewards are high.
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