TFSA: How to CRA-Proof Your Passive-Income Portfolio

Inovalis REIT (TSX:INO.UN) is a great addition to a passive-income TFSA for dividend investors looking to CRA-proof their investment income streams.

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Unless you effectively leverage your registered accounts like the TFSA (Tax-Free Savings Account), the CRA (Canada Revenue Agency) is going to take a slice of your dividends, distributions, and interest generated from your passive-income investments.

For Canadians looking to give themselves a raise, the TFSA is an invaluable tool that can help you keep every dollar of your investment income. And for young, growth-savvy investors, the TFSA is a profoundly powerful tool that helps its users unlock the magic to be had in tax-free compounding over the long term. To many Canadians, the true power of the TFSA account is difficult to fathom. Over the near to intermediate term, it makes a somewhat remarkable difference, but throughout 10, 20, even 30 years, the TFSA can make a world of difference.

Indeed, the TFSA is a flexible tool that rewards both income and growth investors alike. Amid these unprecedented times, many young people are feeling the full force of the COVID-19 impact. Short on cash, many have looked to financial support from the federal government with relief benefits such as the CRA’s CERB (Canada Emergency Response Benefit), which is slated to end in favour of a beefed-up version of EI (Employment Insurance).

While government transfer payments can provide some relief, the amount is not nearly enough for many to meet the monthly expenses of living. Heck, in Vancouver, a two-bedroom apartment exceeds the $2,000 monthly amount of the CERB.

So, for those who need more income to get through this crisis, TFSA users can shift their strategy from growth based to income based. While the rate of growing your wealth will slow down, you will be able to support yourself with sustainable income payments without running the risk of running out of money by spending the principal.

There’s no telling how much longer Canadians who’ve lost their jobs from the COVID-19 impact will be back at it again. As such, it’s a wise idea to focus on sustainable income generation, as you look to get back on your feet. Once you’ve regained your employment, you can easily shift your TFSA back into growth mode. The tax-free account is versatile, and it can help you get through tough times just as well as it can help you grow your wealth without having to worry about owing money to the CRA.

A +10% yielder to stash in your TFSA for CRA-proof income

If you own shares of high-growth companies that pay no dividends in your TFSA, consider taking profits and rotating funds into a bountiful high-yield REIT such as Inovalis REIT (TSX:INO.UN), which sports a colossal 10.2% yield at the time of writing.

Now, I know what you’re thinking. Stretching one’s yield that far is risky. Warren Buffett once said that the pursuit of reaching for yield is “stupid, but very human.” While true to an extent, I think it’s a bad idea to shun high yielders based on an arbitrary rule of thumb like the 4% rule.

Moreover, if you’re willing to do your homework, it is possible to lock in a bountiful distribution that won’t be subject to reductions. By conducting a careful analysis of a security’s operating cash flow (or adjusted funds from operations in the case of REITs) and paying close attention to the state of the balance sheet, one can unlock tremendous value while steering clear of dividend cuts and distribution reductions as well as avoiding potentially steep capital losses.

Wait, isn’t reaching for a 10% yield risky?

Yes, there’s risk to the name in a worsening of the pandemic, but as a part of a diversified TFSA, such risks can be mitigated.

Inovalis REIT is a European-focused play on office properties. Offices have been clobbered by the crisis, and while the yield may seem unsustainable, I’d argue that it’s far more sustainable than almost every other double-digit yielder out there today. Why? Inovalis has a high yield by design. Under normalized conditions, the yield tends to hover around the 8% mark. After the recent hit taken by the COVID-19 crisis, a +10% yield, by comparison, isn’t all as horrific as it seems.

Consider the fact that Inovalis has begun to report nearly normal quarterly rent collection, and it becomes more apparent that Inovalis is a compelling high-yield value investment.

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. The Motley Fool recommends Inovalis REIT.

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