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Canada Revenue Agency: Earn an Extra $750 a Month of Tax-Free Income

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We all want to increase our income in whatever way we can. And the only thing that’s better than increasing our income, is doing so while keeping the Canada Revenue Agency from taking any tax.

That’s why Canadians are so lucky to have registered investing accounts like the Tax-Free Savings Account (TFSA). The TFSA is an incredibly useful tool for Canadians to save and invest their money, with all proceeds being tax-free.

The account launched back in 2009, and when 2021 starts less than three weeks from now, Canadians who have been eligible since year one will have $75,500 of total contribution room.

Use the TFSA to compound your savings

Many Canadians use the TFSA as a high-interest savings account. That’s a major mistake. The TFSA gives Canadians the opportunity to earn tax-free income. That’s something that could be worth hundreds of thousands of dollars over several decades of investing.

That’s why it’s crucial you use the TFSA to invest in high-quality, long-term stocks. While the contribution limit will be more than $75,000 in 2021, savvy investors will have already grown their investment to be a lot more than that.

An investor who has contributed the full amount to the TFSA each year and grown their capital at an achievable 7.5% compounded annual growth rate would have a total TFSA value of roughly $112,000 by the end of 2020.

That means by the time the investor contributed their $6,000 in 2021, they would have nearly $120,000 in their TFSA.

With $120,000, if investors could continue to earn that same 7.5% per year in passive income, that would generate $9,000 a year or $750 a month of earnings, all of which the Canada Revenue Agency can’t touch.

The opportunity today

If you haven’t been investing your money since year one, fear not. It doesn’t take much to get yourself on the right track today. And you’ll quickly see that one of the most important aspects of investing is duration, to give your money the time to compound.

One of the best stocks that I would consider investing in today is Enbridge Inc (TSX:ENB)(NYSE:ENB). Enbridge can help you to grow and compound your money tremendously, which is why you’ll want to own it in a TFSA to keep your profits from the Canada Revenue Agency.

It’s one of the top long-term growth stocks on the market, but it also pays a significant dividend to investors as well. This is key as it grows the value of your investments as well as returns cash to you to find other high-quality investments.

Enbridge is a massive energy company with diversified operations all across North America proven to be highly resilient. It’s also a Dividend Aristocrat, having increased its dividend for 26 consecutive years now.

This makes it a great stock for any investor, but especially long-term investors. Over the past 10 years, Enbridge’s quarterly dividend has more than tripled. So for all those investors who own the stock in a TFSA, their income from Enbridge has grown more than 200%, and they don’t have to pay any additional tax on it to the Canada Revenue Agency.

This is extremely promising for investors who own the stock for the passive income. That’s also why it’s one of the top stocks to consider buying today. It even managed to increase the dividend again this year, after weathering the coronavirus pandemic extremely well. That dividend yields an attractive 7.7% today.

Bottom line

Saving on the taxes you owe to the Canada Revenue Agency is just as important as buying high-quality stocks and investing for the long-term. It’s all about compounding, so any fees or taxes you can save on to boost your net return will go a long way.

Speaking of long-term stocks that can compound your savings, check out these five picks!

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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 Daniel Da Costa owns shares of ENBRIDGE INC. The Motley Fool owns shares of and recommends Enbridge.

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