The CRA Is Watching Your TFSA: 3 Dangers to Avoid

There are regular investing mistakes, like chasing hype stocks or panic selling at the bottom. Then there are mistakes that can attract legal scrutiny, especially inside a Tax-Free Savings Account (TFSA). Those are the ones that can turn a great tool into a very expensive headache.

In 2026, three TFSA missteps come up again and again. None of them involve bad stock picks. All of them involve how the account is used. And yes, the Canada Revenue Agency (CRA) absolutely pays attention to these. Let’s go through them, starting with the most misunderstood.

Being a U.S. dual citizen

If you’re a U.S. citizen living in Canada, the TFSA is a trap if you don’t know what you’re doing.

The U.S. taxes based on citizenship, not residency. That means even if you live full-time in Canada, the Internal Revenue Service still expects reporting. While the RRSP is recognized under the tax treaty, the TFSA is not.

From the U.S. side, a TFSA isn’t tax-free at all. Income, dividends, and capital gains earned inside it may still be taxable. On top of that, TFSAs can trigger extra disclosure forms, which come with steep penalties if filed incorrectly or not at all.

This turns what is supposed to be a simple Canadian account into a compliance nightmare. If you’re a U.S. and Canadian dual citizen, don’t open or contribute to a TFSA casually. Talk to a cross-border tax professional first. This one mistake alone has burned a lot of people.

Day trading inside your TFSA

The TFSA was designed for long-term investing, not running a trading desk.

There’s no hard rule that says “X trades per month is illegal.” Instead, the CRA looks at behaviour. Things like frequent buying and selling, very short holding periods, using options, or spending significant time trading can all work against you.

If your activity starts to resemble a business, the CRA may decide you’re carrying on trading as a business inside your TFSA. If that happens, the income can be fully taxable. In some cases, penalties apply too.

The worst part is that this usually gets flagged after the gains are made. Long-term investing rarely attracts attention. Rapid trading does.

Overcontributing to your TFSA

This is the most common and the easiest mistake to make.

Your TFSA contribution room depends on when you became a Canadian resident, when you turned 18, your past contributions, and your withdrawals. Every year, you also get new room. For 2026, that new room is $7,000.

The CRA’s online estimate is helpful but not always up to date. If you overcontribute, the penalty is 1% per month on the excess amount for as long as it stays in the account. That adds up fast and compounds the wrong way.

Bottom line: track your own TFSA room. Don’t rely blindly on the portal.

The post The CRA Is Watching Your TFSA: 3 Dangers to Avoid appeared first on The Motley Fool Canada.

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More reading

• Hitting All-Time Highs: Is Energy Fuels Stock Still a Buy in 2026?
• How to Pick the Best 5%+ Dividends in the Canadian Energy Sector
• Goodbye, GICs: These Dividend Stocks Are a Far Better Buy
• 5 Stocks for Canadian Dividend Investors
• 1 Reason I’m Never Selling Celestica Stock

Fool contributor Tony Dong has no position in any of the stocks mentioned.