TFSA investors should avoid these red flags
The biggest advantage of TFSA is the tax-free growth of investments and tax-free withdrawals. If you had invested $5,000 in it Bombardier in January 2021, it would be worth $97,485 today. And if you invested through a TFSA, you could withdraw the full amount tax-free. That is the power of a TFSA.
Although the account does not tax your investment income, the CRA monitors the instrument you invest in and the frequency of your investment. The purpose of the TFSA is to encourage Canadians to save in publicly traded and regulated investment options that can provide long-term returns.
Red Flag #1: Investing in unqualified investments
Highly volatile investment instruments, such as cryptocurrencies and derivatives, do not qualify as TFSA investments. The CRA allows you to invest in stocks, bonds, and exchange-traded funds traded on popular exchanges such as the TSX, NYSE, and NASDAQ.
Yes, you can invest in US stocks and enjoy the same tax-free investment income. However, dividends from US stocks are subject to withholding tax. That’s why the best TFSA investments are US growth stocks Broadcom And Nvidia (NASDAQ: NVDA). They can double or triple your money in just a few years.
Red Flag #2: Trading TFSA
Another area that CRA is monitoring is trading activity. You can buy and sell TSX shares, but frequency also plays a role. Remember, TFSA is not for trading, but for investing. If you buy and sell one stock too often, the CRA may keep an eye on things. That doesn’t mean you can’t continue buying a particular stock in small quantities.
Say you invest $100 in two stocks every week to accumulate a significant number of shares, that’s still investing. This would become a trade if you continue to sell that stock at small intervals after purchasing, shortening the holding period of the stock. The CRA has no specific threshold for what frequency counts as trading, but a short holding period will certainly raise eyebrows.
Red flag #3: Contribution space miscalculated
While the biggest problem with millennials is that they contribute too little to their TFSA, this idea is based on an average balance. Your TFSA balance does not determine your contribution room. The TFSA contribution limit for 2026 is $7,000. If you invest $7,000 in February, withdraw $4,000 in April, and contribute that $4,000 again in October, you would have contributed $11,000 in 2026 even though your balance is only $7,000.
If you had no contribution room in the past year, you will be charged a 1% penalty on the $4,000 excess contribution for each month you remain invested. That doesn’t mean you can’t contribute what you record. The CRA will add your 2026 TFSA withdrawals to your contribution room on January 1, 2027.
The right way to invest in a TFSA
TFSA is a powerful tool and can earn you millions in tax-free income if you use it correctly. First, invest in high-growth stocks and stay invested for the long term. Second, if you want to withdraw money every month, keep rebalancing by selling a few growth stocks to make a profit and using that money to buy high-yield dividend stocks. This way you don’t withdraw your investments, but reinvest them and receive payouts.
NVIDIA is a growth stock to buy and hold for the long term, even after it prices in its artificial intelligence (AI) rally. AI is not just a wave, but a revolution that is shaping the future, just like the internet in the early 2000s and the cloud in the early 2010s. Many companies are exploring ways to get value from AI. Meanwhile, Nvidia is preparing for autonomous cars and AI at the edge, which will be the next big growth cycle in the next decade.
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