Saving money without paying taxes on it sounds great, and that’s exactly what the Tax-Free Savings Account (TFSA) offers to Canadians. This account lets you earn interest, dividends, and capital gains completely tax-free. Because of this benefit, many Canadians use the TFSA to grow their savings faster.
But there’s a catch. While the TFSA is a great tool, the Canada Revenue Agency (CRA) has strict rules around how it should be used. If you break these rules—sometimes even by mistake—it could lead to extra taxes, fines, or even an audit.
It’s important to understand the three most common TFSA mistakes that often cause trouble with the CRA. By learning about them, you can avoid serious problems and keep your savings growing smoothly. Let’s look at each one and learn how to stay on the safe side.
1. Don’t Turn Your TFSA into a Trading Business
One major mistake people make is using their TFSA to trade stocks like a business. While it’s okay to buy and sell investments in your TFSA, doing it too often can be a problem. If you trade too frequently or aim for quick profits, the CRA might think you’re running a business inside your TFSA.
Why This Is Risky
When the CRA sees too many trades or short-term moves, they may think you’re making “business income,” which is not tax-free. If they decide your activity looks like day trading, your profits could be taxed, even though they’re inside a TFSA.
How to Stay on Track
Try to hold investments for longer periods, and focus on steady growth instead of quick wins. If you like trading often, it’s better to use a regular investment account instead. A TFSA is best for long-term strategies like buying ETFs or dividend-paying stocks and keeping them for years.
2. Quick Buying and Selling Raises Red Flags
Another mistake is selling your investments too soon. If you keep buying and selling within days or weeks, the CRA may notice. The TFSA was made to help Canadians build wealth slowly, not to flip stocks quickly.
What the CRA Looks At
They check how long you keep each investment. If they see a pattern of short holding times, they might think you’re treating your TFSA like a business, even if that’s not your goal.
How to Be Safe
Try to hold investments for at least several months. Occasional selling is fine, especially if you need the money or want to make changes. But frequent short-term trades can look suspicious. Always think long-term when using your TFSA.
3. Don’t Put in More Than You’re Allowed
The TFSA has a yearly contribution limit. For 2024, the limit is $7,000. If you put in more than your total available room (including unused space from past years), you’ll face a penalty—even if you didn’t mean to.
What Happens If You Go Over
The CRA charges 1% per month on the extra amount you added. For example, putting in $2,000 too much means a $20 fine each month. If you leave it too long, the penalty grows quickly.
How to Avoid Overcontributing
- Always check your limit on the CRA’s My Account website.
- Be careful if you take money out and put it back in the same year—it can count as a new contribution.
- If you go over by mistake, remove the extra funds as soon as you can to reduce the penalty.
Why Following TFSA Rules Is So Important
CRA Monitors Everything Closely
Banks and investment firms send your TFSA information to the CRA every year. If they see anything unusual, your account could be flagged. Then, the CRA might audit your TFSA and ask for records of your trades, income, and other details.
Watch Out for Non-Approved Investments
Some investments aren’t allowed inside a TFSA. These include certain private company shares or specific foreign assets. If you buy these, you could face taxes and penalties—even if you didn’t know they weren’t allowed.
Tips to Keep Your TFSA Problem-Free
- Always stay within your yearly contribution limit.
- Don’t trade too often—keep your account focused on long-term savings.
- Stick to approved investments like mutual funds, government bonds, or public stocks.
- Use your TFSA for goals like retirement, emergency funds, or big future expenses—not for daily trading.