The Motley Fool

CRA Taxes the CERB: How to Get BIG Tax-Free Income 100%!

Image source: Getty Images

The CRA is paying $2,000 per month in CERB payments to eligible Canadians during this COVID-19 crisis. CERB payments are taxable as ordinary income. Therefore, the amount taxed will depend on your total income and marginal tax rate for the year.

There’s a way to get 100% of BIG tax-free income — using your Tax-Free Savings Account (TFSA) to its fullest!

How to get BIG tax-free income from your TFSA

Interest rates are low. As a result, most interest-bearing investments are uncompelling. To get BIG tax-free income from your TFSA, you’ve got to look towards big dividend stocks.

In any market, it’s risky to chase yields. It’s even riskier to do so in today’s stressful environment. Even blue-chip names like Suncor and Wells Fargo have fallen into the dividend-cut bucket this year.

That said, sometimes it could be a rare buying opportunity to buy stocks in anticipation of partial dividend cuts. However, it’s a risky business. Oftentimes, long before a stock actually cuts its dividend, the market would have sensed something and sold it off.

For example, H&R REIT stock fell as much as 60% before it cut its dividend. I picked up some shares in April before it announced a 50% dividend cut in May.

Buyers of H&R REIT today can get a 7% yield that’s an attractive income. Additionally, its dividend (and stock price) is likely recover to higher places, as the economy normalizes over the next few years.

Investors need to research high-yield stocks carefully and decide on a case-by-case basis if they’re worth investing in from an income and total return perspective.

Some places you can explore for relatively big dividends are real estate investment trusts (REITs), banks, and utilities.

Be careful to avoid BIG withholding taxes on foreign dividends

If you’re earning dividends from a company that’s domiciled in another country, there’s a good chance that there will be foreign withholding taxes on those dividends. The TFSA cannot prevent the foreign country from taking that tax. In that sense, the TFSA is not entirely tax free.

To make sure your TFSA stays 100% tax free, avoid foreign dividend stocks.

That said, sometimes the foreign income portion may be so small that the withholding tax is negligible in comparison to your total returns.

For example, I took the 2020 market crash as an opportunity to buy Brookfield Property Partners shares in my TFSA. Some people may have avoided the stock, because they’re unsure of how its fat dividend yield would be taxed. I just received my first cash distribution from the stock.

Less than 0.15% of that quarterly cash distribution was taxed. That’s a negligible expense for a stock that’s still paying more than 11% per year today. Moreover, I expect great long-term price appreciation from it at the current dirt-cheap levels.

In summary, be careful to avoid BIG withholding taxes on foreign dividends in your TFSA. However, you might choose to invest in foreign stocks with low yields or small overall withholding taxes if their total return profiles are attractive.

The Foolish takeaway

I could have simply recommended a few high-yield stocks for this article. However, I hope I showed that investing is actually not that simple. Behind each stock is a real business. Each business faces unique challenges and opportunities every day. Additionally, investors’ risk tolerance, knowledge in investing, and investment horizon are different.

If you’re only getting high yields from your TFSA, you need to be careful of concentration risk. REITs, banks, and utilities are still great places to earn big income from. However, you should also consider diversifying your portfolio into, say, technology, healthcare, and consumer staples to spread your risk around and to avoid huge drawdowns of your portfolio for an extended time.

Speaking of big income...

The 10 Best Stocks to Buy This Month

Renowned Canadian investor Iain Butler just named 10 stocks for Canadians to buy TODAY. So if you’re tired of reading about other people getting rich in the stock market, this might be a good day for you.
Because Motley Fool Canada is offering a full 65% off the list price of their top stock-picking service, plus a complete membership fee back guarantee on what you pay for the service. Simply click here to discover how you can take advantage of this.

Click Here to Learn More Today!

Fool contributor Kay Ng owns shares of Suncor Energy, Brookfield Property Partners and H&R REAL ESTATE INV TRUST. The Motley Fool recommends Brookfield Property Partners LP.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.