Canadian savers can take advantage of their Tax-Free Savings Account (TFSA) contribution space to build portfolios of investments that generate a steady stream of tax-free passive income.
TFSA facts
The government created the TFSA in 2009 with the goal of giving Canadians an alternative to the Registered Retirement Savings Plan (RRSP) for setting funds aside to cover retirement living costs. The TFSA is also useful for people who want to save for other spending goals. Since its inception, the TFSA contribution limit has now grown to a maximum of $88,000 for anyone who has qualified every year. The TFSA limit in 2023 is $6,500.
All interest, dividends, and capital gains generated inside a TFSA can be paid out tax-free. Funds removed from the TFSA open up new contribution room in the following calendar year in addition to the annual increase in the TFSA limit.
Pensioners can use the TFSA to generate cash flow that isn’t counted by the Canada Revenue Agency towards net world income when determining the Old Age Security (OAS) pension recovery tax. This is an important benefit for seniors who earn enough taxable income from their various pensions to put them near or above the minimum net world income threshold that triggers the 15% OAS clawback. The number to watch for the 2023 income year is $86,912.
Best TFSA investments?
Guaranteed Investment Certificates (GICs) now pay attractive rates in the 5% range. These fixed-income investments are risk-free and deserve to be part of the TFSA portfolio.
Dividend stocks that raise their distributions annually are also good candidates. Stock prices can fall as well as rise, so investors need to be able to ride out some volatility. The market correction over the past year has driven down the share prices of some top TSX dividend stocks to the point where they offer high yields and a shot at decent capital gains on a rebound.
TC Energy
TC Energy (TSX: TRP) is a major player in the North American energy infrastructure industry, with 93,000 kilometres of natural gas pipelines and 650 billion cubic feet of natural gas storage capacity in Canada, the United States, and Mexico.
The board has increased the dividend annually for more than two decades and intends to boost the payout by at least 3% per year over the medium term. TC Energy is working through a $34 billion capital program that should drive revenue and cash flow higher in the next few years.
TRP stock trades for less than $52 per share at the time of writing compared to more than $70 in July last year.
Rising interest rates make borrowing more expensive to fund projects. This is one reason the stock is down over the past year. TC Energy has also had trouble with soaring expenses on a major pipeline development, but the Coastal GasLink project is now roughly 90% complete.
Investors who buy TRP at the current stock price can get a 7.2% dividend yield.
The bottom line on TFSA passive income
TC Energy is a good example of a top TSX dividend stock that pays a reliable distribution and offers a very attractive yield. TFSA investors can easily put together a diversified portfolio of top TSX dividend stocks and GICs right now to deliver an average yield of 6%.
At this rate of return, a TFSA valued at $88,000 would be able to generate $5,280 per year, or an average of $440 per month in tax-free passive income.
