The primary aim of a TFSA (Tax-Free Savings Account) is to earn income that is sheltered from taxes. So, some might wonder how it’s possible to earn income in a TFSA that could be subject to taxes.
But Canadians should note that there are a few mistakes that might attract taxes. For example, the Canada Revenue Agency (CRA) will tax dividends of U.S. stocks such as Apple, Microsoft, and Exxon Mobil.
Another common TFSA mistake is using this registered account like a business. The cumulative TFSA contribution room in 2023 has increased to $88,000 since the account was first introduced in 2009. If your TFSA portfolio has surpassed $250,000, the CRA might get interested and tax you as a business.
One more way the TFSA could be taxed as a business is if you trade often and surpass the contribution room in a particular year. The TFSA is ideal for those looking to generate long-term wealth and benefit from the power of compounding.
Here’s how you can use the TFSA and create massive income in this account.
Hold dividend-growth stocks in a TFSA
Canadians should invest in stocks that pay dividends and that grow these payouts consistently over time. So, investors need to identify companies that are part of an expanding addressable market that will allow them to keep increasing cash flows and drive dividend growth.
One such megatrend is the clean energy space which will attract trillions of dollars in investments globally. Brookfield Renewable Partners (TSX:BEP.UN) is among the largest players in this sector that offers shareholders a tasty dividend yield of 5%.
Down 44% from all-time highs, BEP stock trades at a discount of 37% to consensus price target estimates. Despite a sluggish macro environment, Brookfield Renewable has delivered double-digit annual FFO (funds from operations) per unit growth in the first six months of 2023.
The company also advanced its development program, commissioning 800 megawatts of capacity, which should increase cash flows by US$9 million annually. It also signed transactions totalling US$300 million in equity investments while focusing on inorganic growth, allowing BEP to increase FFO by at least 10% annually in 2023.
Brookfield Renewable Partners continues to expand
In the second quarter (Q2) of 2023, Brookfield Renewable Partners reported an FFO of US$312 million. Additionally, it announced the acquisition of Duke Energy Renewables for US$1.05 billion, a fully integrated developer and operator of renewable power assets in the United States. Duke Energy develops and operates renewable power assets with generating capacity of 5,900 megawatts and a development pipeline of 6,100 megawatts.
The acquisition allows BEP to gain exposure to an operating renewable platform with strong contracted cash flows. Brookfield Renewable Partners emphasized, “Our financial strength, credibility as a counterparty, and capacity to review, underwrite and execute a scale investment quickly were integral to reaching an agreement with Duke; in addition to our ability to carve out a large renewable power platform spread across multiple markets in the U.S.”
Brookfield Renewable Partners ended Q2 with US$4.5 billion in liquidity, providing it with enough flexibility to fund its expansion plans. In the last 18 months, it has closed or agreed to invest up to US$21 billion, which should drive future cash flows higher and support dividend hikes.
