Savvy Canadians have been amassing tax-free passive income, legally, every month, since 2009. The introduction of the Canadian Tax-Free Savings Account (TFSA) was an empowering move that ushered in an era of untamed compounding of investment returns forever, for every citizen who wished to engineer their financial freedom.
Given that the cumulative TFSA contribution room for eligible Canadians (since 2009) stands at $88,000 today, including $6,500 for 2023, an eligible individual who has never used their TFSA contribution room may move $88,000 into the account this year. That amount could earn about $480 in regular passive income every month, tax-free.
How to make $480 per month in tax-free passive income
One of the best ways to generate $480 in monthly passive income in a TFSA is to allocate the contribution room into buying Canadian Real Estate Investment Trusts (REITs) with an average 6% distribution yield.
Canadian REITs allow real estate investors to avoid income taxes on two levels. Firstly, they are exempt from paying income taxes at the trust level, as long as they pay out the majority of their annual income as distributions to investors. Secondly, REITs are eligible investments in a TFSA; their income distributions can enjoy the tax-shelter. Investors can avoid real estate income taxes completely by adding REITs to a TFSA portfolio.
An investor should aim to invest in REITs that have low or manageable payout rates of adjusted funds from operations (AFFO), growing property portfolios, and high and stable portfolio occupancy rates.
We have a number of REIT options to choose from. I’ll touch on three.
CT REIT
CT Real Estate Investment Trust (TSX: CRT.UN) is a best-in-class retail property trust majority owned by its key tenant, the Canadian Tire Corporation. The trust has paid growing distributions to investors for 10 consecutive years, and it recently announced its tenth distribution increase last month.
The REIT enjoys full portfolio occupancy rates. It paid out 73.8% of its AFFO (the most recurring distributable cash flow from rental income) to investors during the first quarter, and its strong development pipeline could finance distribution increases in future financial periods.
The CT REIT distribution looks well secured, and should yield 5.9% over the next 12 months.
SmartCentres REIT
SmartCentres Real Estate Investment Trust (TSX: SRU.UN) holds a portfolio of open air shopping mall properties that are nearly fully occupied. The trust is intensifying its development of properties. It is building self-storage units and high-rise residential and multipurpose buildings on existing retail properties, further increasing traffic and population densities on its malls, and that move could be accretive to AFFO.
What’s to like about SmartCentres REIT? The trust pays a monthly distribution that curently yields 7.3% annually. Its distributions are supported by a best-in-class in place occupancy rate of 98% on shopping centres. It reported 4% growth in same property net operating income (NOI) during the first quarter of 2023, and its AFFO payout rate improved to 93% by March 31, 2023, down from 96% during the same quarter last year.
Rent escalations helped boost the REIT’s income, and new leases on recently completed new developments may enhance AFFO coverage of its distributions in future financial periods.
Canadian Net REIT
Dynamite comes in small packages, and Canadian Net REIT (TSXV: NET.UN) is a triple-net real estate property play with a 100% occupancy rate that could fortify passive income portfolios. The small REIT generates low-risk property cash flows unexposed to property taxes and volatile property management expenses.
The trust reported 4% year-over-year growth in funds from operations (FFO) per unit during the first quarter. Quarterly AFFO was 6.6% higher year over year. New property acquisitions and rent increases are working well to increase trust net operating income (which increased by 15.4% year over year in Q1).
Canadian Net REIT pays out about 57% of its annual AFFO. The distribution should yield 6.5% annually, and its well covered by recurring cash flows.
How to generate $480 in monthly passive income
One may equally split TFSA contribution room and invest up to $29,330 in each of the three Canadian REITs as shown in the table below.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| CT REIT (TSX: CRT.UN) | $15.25 | 1,923 | $0.07485 | $143.94 | Monthly |
| Canadian Net REIT (TSXV: NET.UN) | $5.34 | 5,493 | $0.02875 | $159.30 | Monthly |
| SmartCentres REIT (TSX: SRU.UN) | $25.49 | 1,150 | $0.154 | $177.10 | Monthly |
| Total | $480.34 | Monthly |
