Image source: Getty Images
The Tax-Free Savings Account (TFSA) is a Canadian staple for growing wealth without paying a dime in tax on gains. It’s flexible, easy to use, and perfect for everything from saving for retirement to investing in the stock market. However, as more Canadians became more savvy with their accounts, the Canada Revenue Agency (CRA) started paying closer attention. The TFSA is meant for savings and investments, not as a loophole for day trading or housing shady assets. And in 2025, the CRA is watching for some very specific red flags.
Over-contributing
One of the biggest issues still catching Canadians off guard is over-contributing. Each year, you get a new limit, and any unused room rolls over. It sounds simple, but mistakes happen more often than you’d think. A common scenario is withdrawing money and replacing it too soon. Let’s say you take out $5,000 in January and think you can put it back in February. Unless you had that $5,000 of unused room, that’s an over-contribution.
The CRA sees it as an extra $5,000 and charges a penalty tax of 1% per month on the excess until it’s withdrawn. That might not sound like much, but if you’re over by a large amount and you leave it for months, the penalties can really add up. What makes this tricky is that the CRA doesn’t calculate your room in real time. So, if you’re switching banks, moving funds, or using more than one TFSA provider, it’s up to you to keep track through the MyCRA Account.
Not a business
The CRA has been flagging accounts that look too much like a business. Now, the TFSA is a great place for investing in stocks. But if you’re treating it like a day trading account, using leverage, and holding positions for hours instead of months, you might raise some eyebrows.
In the CRA’s eyes, that starts to look like business income, not investment income. And if that happens, the CRA taxes any profits made inside your TFSA. Not just taxed moving forward, retroactively taxed for all the years you’ve been doing it. There’s no clear rule on how many trades are too many, but volume, frequency, and the use of borrowed money can all factor in. So, if you’re placing trades every other day and racking up gains with short-term bets, you might want to consider moving that activity outside your TFSA.
What to hold
Then there’s the question of what you’re actually holding inside your TFSA. You’re allowed to hold publicly traded stocks, exchange-traded funds (ETF), guaranteed investment certificates, bonds, and mutual funds. But prohibited investments, like shares of a private company where you or someone close to you holds control, are not allowed. And the consequences here are severe.
If the CRA finds out you’ve put a prohibited investment in your TFSA, they can hit you with a tax equal to 50% of the value of that asset at the time it was added. That’s on top of other penalties. It doesn’t matter if the asset hasn’t gone up in value or if you weren’t aware it was prohibited. What counts is whether it violates the rules.
Consider CDZ
Here’s where ETFs can make things even easier. A great example is iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (TSX:CDZ). It holds a basket of top Canadian companies that have increased their dividends for at least five straight years. That’s the kind of long-term, stable growth the CRA likes to see in a TFSA.
CDZ is ideal for investors who want exposure to multiple sectors without having to manage a bunch of individual stocks. It pays monthly income, making it perfect for passive investors, and it spreads out risk by holding dozens of dividend growers. Plus, the yield is attractive, hovering around 4%, and best of all, it keeps your TFSA simple and on the right side of CRA rules. If you’re nervous about trading too much or just want to set it and forget it, CDZ could be your new best friend.