Canada Revenue Agency: A TFSA-Worthy Top Pick for Big, Untaxable Income

Consider buying some H&R REIT (TSX:HR.UN) for your TFSA if you’re looking for big income that Canada Revenue Agency can’t tax.

| More on:
Piggy bank next to a financial report

Image source: Getty Images.

Although the Canada Revenue Agency taxes Canadian dividends at a favourable rate, the effects of taxation can really add up over time.

With long-term compounding taken into consideration, the effects of taxation can mean the difference between a comfortable retirement and a frugal one. Fortunately, there is an answer for Canadians who want to keep more of their money while legally not having to give the taxman a slice of the pie: the Tax-Free Savings Account (TFSA).

Canada Revenue Agency: Shield your investment income with your TFSA

With rock-bottom interest rates that could be on the verge of going negative, you’re not going to want to use your TFSA as a mere savings account, unless, of course, you’re just using a portion of your TFSA proceeds to hold your emergency fund or maintain ample liquidity through these unprecedented times.

If you’re young, have a sufficient emergency fund in place, you’re going to want to use your TFSA as a Tax-Free Investment Account (the TFSA should really be called the TFIA!) and use it to purchase shares of businesses that can pay you handsome dividends (or distributions) that are positioned to grow at a sustained, above-average rate over time.

That way, you’ll have a tax-free income stream. If you pick your securities carefully, you’ll nearly guarantee yourself a high single-digit percentage raise every single year, while removing taxes from the Canada Revenue Agency from the equation — something that’s unsustainable for those in the labour force.

If you’ve yet to invest your 2020 TFSA contribution ($6,000), or you’ve been putting off contributing for the last few years, now is as good a time as any to catch up and start investing in battered income-paying securities, while their shares are down (and their yields, up) on the coronavirus (COVID-19) crisis.

Lock in a 15.3%-yielding distribution for your TFSA, so the Canada Revenue Agency can’t tax it

Without further ado, consider shares of H&R REIT (TSX:HR.UN), a battered security within the hard-hit real estate sub-industries of office and retail. The coronavirus has crushed both retail and office properties, but I see the damage as excessive when it comes to the diversified REIT that could rebound in a big way over the coming years, as it did following the unprecedented collapse in 2007-08.

H&R REIT was a go-to income investment option for Canadian investors for many years. The lower degree of volatility relative to the broader markets and the outsized distribution made the name a staple for conservative income investors. When the coronavirus hit, though, none of the low volatility from H&R’s past mattered, as shares crumbled like a paper bag, causing its 6% yield to more than double to 15.3%, where it sits today.

Imagine a 15.3%-yielding distribution that’s off-limits for the Canada Revenue Agency.

The yield is growing suspect at these heights, though, and while the distribution is becoming stretched amid the rise of “working and shopping from home,” as many look to self-isolate to minimize their risk of contracting the deadly COVID-19.

Retail and office properties are becoming barren wastelands these days, and with many tenants feeling the financial pressure, landlords are going to need to chase tenants for their month’s rent and form rent-deferral plans with each tenant whose cash flows were disrupted by the coronavirus crisis.

Foolish takeaway

As a retail and office REIT, H&R looks like a dud, but the damage, I believe, is overblown since H&R collected 83% of rents payable on April 1.

Even if a distribution is reduced, I see it recovering once we make a return to normality and the ability of its tenants to pay recovers in conjunction with the economy.

Still, there’s a risk that firms renting office space may stick with telecommuting for good. Regardless, H&R is too cheap given the re-purposing potential and the outsized income that the Canada Revenue Agency won’t be able to touch if held in your TFSA. If you’re a retiree who depends on income, start by nibbling on the name with your TFSA, and if you’re a risk-tolerant youngster, feel free to start backing up the truck today.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned.

More on Dividend Stocks

investment research
Dividend Stocks

Young Investors: Create Cash Flow With This Top Dividend Stock

If you're a young investor looking for cash flow, you need a strong dividend stock and solid banking program designed…

Read more »

Hand writing Time for Action concept with red marker on transparent wipe board.
Dividend Stocks

3 Superb Dividend Stocks I’m Ready to Buy

The market is full of great options for income-seeking investors. Here are three superb dividend stocks to buy now.

Read more »

Payday ringed on a calendar
Dividend Stocks

Gen Z Investors: Create a Stable Passive-Income Stream of $188/Month for Retirement

This passive-income stock is perfect for Gen Z investors who don't have much to invest but want to see stable,…

Read more »

exchange-traded funds
Dividend Stocks

2 ETF Bargains You Shouldn’t Miss in 2022

Index ETFs are only discounted when there is a market-wide slump, which is rarer than sector-specific dips, so you should…

Read more »

House Key And Keychain On Wooden Table
Dividend Stocks

2 Real Estate Stocks to Add Growth to Your Portfolio

The right real estate investments, whether they are properties or real estate stocks, usually offer a decent mix of income…

Read more »

Canadian energy stocks are rising with oil prices
Dividend Stocks

2 Canadian Energy Stocks With Ridiculously Fast-Growing Dividends

Canadian energy stocks are gushing cash and there's plenty left for shareholders. Here are two stocks for ridiculously fast-growing dividends

Read more »

retirees and finances
Dividend Stocks

Retirees: 2 Top TSX Dividend Stocks to Buy for TFSA Passive Income

These industry leaders pay attractive dividends for a portfolio focused on passive income.

Read more »

Canadian stocks are rising
Dividend Stocks

2 High-Quality Real Estate Plays to Buy for High-Yielding Dividends

Take advantage of the housing market cooldown by investing in these two quality REITs.

Read more »