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Warning: 3 Ways the CRA Can Tax Your TFSA!


The TFSA, or Tax-Free Savings Account, was first introduced back in 2009, and the registered account has gained in popularity among Canadian residents. Any contributions made towards the TFSA are exempt from the Canada Revenue Agency taxes. Its tax-sheltered feature makes the TFSA ideal for investors to hold a variety of financial instruments ranging from equities, bonds, mutual funds, and exchange-traded funds.

However, there are certain cases when the CRA can tax your TFSA. Here are three such scenarios.

Don’t overcontribute towards the TFSA

Investors need to keep the TFSA contribution limits in mind before allocating funds to this account. For 2022, the TFSA contribution limit stands at $6,000, and the cumulative contribution limit is $81,500.

So, if you have already contributed $6,000 towards the TFSA in 2022 and have withdrawn $8000 from the account year-to-date, you still have to wait until 2023 to make the next contribution. The CRA imposes a tax of 1% per month for any excess contributions toward the TFSA.

The CRA can tax non-qualified investments

There are certain investments prohibited by the Canada Revenue Agency that might attract taxes up to 50% of the fair market value of these unqualified investments. Residents might also be liable for a 100% advantage tax on income earned in the form of capital gains if they hold unqualified investments.

Non-residents can’t contribute to the TFSA

The CRA will levy a 1% tax each month if a non-resident makes any TFSA contributions. Yes, the TFSA is a flexible investment vehicle that can help investors build massive wealth over time. But you need to understand the regulations associated with the TFSA before you allocate funds here. Basically, Canadian residents need to limit contribution amounts and invest in assets that are qualified by the CRA.

So, which investments should TFSA holders consider in 2022? With rising interest rates and red-hot inflation, it makes sense to invest in companies that have a wide economic moat and enjoy pricing power, such as Canadian National Railway (TSX:CNR)(NYSE:CNI).

This TSX stock can convert $6,000 into $100,000

One of the largest companies on the TSX, Canadian National Railway, has returned almost 2,000% to investors in dividend-adjusted gains in the last two decades, easily outpacing the broader markets. So, a $6,000 investment in CNR 20 years would be worth close to $125,000 today.

Further, $6,000 would have allowed investors to buy 540 shares of the CNR. These shares would then pay investors an annual dividend of $86 in the next 12 months. If you held 540 CNR shares today, your annual dividends would increase to $1,582, increasing your effective yield from 1.43% to more than 26% in this period.

Even if CNR’s share price remains the same, long-term investors will yield market-beating returns for the rest of their life.

Canadian National Railway is extremely essential to the Canadian economy. It transports 300 million tonnes of natural resources and various other products throughout North America each year. Equipped with a rail network of 18,600 miles, Canadian National Railway connects the country’s eastern and western coasts with the southern coast of the United States.

Despite a challenging macro-environment, the company is forecast to expand earnings from $5.94 per share in 2021 to $8.07 per share in 2023.

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