One positive result of the health crisis is the shift in focus among Canadians. Suddenly, building up funds for rainy days or saving for the future is the concern. Rather than spending their money on a pandemic, people have increased their overall contributions to the Tax Free Savings Account (TFSA).

According to the results of BMO Annual TFSA survey released in December 2020, approximately 68% of Canadians have a TFSA. The same poll also found that about 72% of Millennials and Canadians over 55 have a TFSA. The TFSA is an investment gem for investors because money growth could be 100% tax free.

All interest, earnings or dividends earned in the account are untouchable by the Canada Revenue Agency (CRA). The tax agency will only impose tax penalties or withholding taxes when TFSA users themselves make three costly mistakes.

1. Exceeding the contribution limit

The CRA sets a maximum amount in statutory dollars per year for the TFSA. This means that a user can only contribute up to the annual contribution limit. While maximizing the limit is ideal, there is no pressure to contribute the full amount. Your unused amount will carry over to the following year. In addition, you can carry forward unused contribution room indefinitely.

If the 2021 TFSA annual contribution limit is $ 6,000, don’t over-contribute. Otherwise, the CRA will impose a penalty tax of 1% per month on the excess contribution. The solution is to immediately remove the excess.

2. Holding of foreign assets

International diversification is allowed, although account holders risk paying 15% withholding tax on foreign dividends. Most TFSA investors hold Canadian dividend stocks, so all dividends are tax exempt. If you want to include US stocks in your portfolio, the alternative is to hold them in a Registered Retirement Savings Plan (RRSP).

3. Day trading

The tax penalties are more severe if you carry on a business in your TFSA. Never engage in day trading. High frequency or aggressive buying and selling of stocks sounds the alarm bells. The CRA might reduce your earnings and treat them like a business or regular income. If you do not follow this rule, your TFSA loses its tax-exempt status since all of your income becomes taxable.

Excessive dividend yield

TFSA investors want nothing more than inflated dividends. If high efficiency is your main consideration, the sustainable choice is none other than Enbridge (TSX: ENB) (NYSE: ENB). North America’s largest energy infrastructure company pays a wholesome 7.18% dividend.

The energy giant’s $ 94.27 billion natural gas and crude oil pipelines stretch for 216,000 kilometers. This vast network crosses North America and the Gulf of Mexico. In addition to high quality liquids and natural gas infrastructure assets, Enbridge has more than 30 renewable energy facilities, including an offshore wind farm in Europe.

Enbridge’s revenues are dependent on transportation volumes and transportation service tolls. Long-term contracts with blue chip customers provide strong visibility into cash flow. In addition, the volume and price risks are non-existent due to the regulated assets.

The current threat to the company is a possible commercial litigation. Enbridge has not closed Line 5 despite the May 12, 2021 deadline set by the Governor of Michigan. The company will continue to operate the pipeline until it receives a court stop order.

Crystal clear rules

TFSA investors shouldn’t pay tax at all if they follow the CRA rules. In addition, account holders whose primary investments are cash lose tax-free benefits.

Foolish contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool owns shares and recommends Enbridge.