The Canada Revenue Agency (CRA) collects taxes for good reason. But if there’s anything investors can perhaps keep to themselves (legally, of course), then they should! And when that amount becomes enormous, all the better.
That’s why today we’re going to focus on how to create passive income that the CRA cannot tax. With the combination of the right savings account, contributions, and reinvestment, you’ll have enormous income ready for retirement.
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Find the right account
In this article, we’ll be focusing on the best of the best in terms of creating tax-free passive income. That means using the best account, which is arguably the Tax-Free Savings Account (TFSA). Since coming on the scene in 2009, the government has added more and more contribution room to the TFSA. Now, it stands at $88,000, after adding in $6,500 in 2023!
The reason I’m focusing on the TFSA is because it’s something investors can use as long as they’re 18 when they get started. That’s it. Beyond following the contribution limits, there isn’t a limit as to when and how much you can take out. It doesn’t turn into a retirement account. And, of course, it’s not taxed by the CRA. Let’s look at the next step in this investing method.
Automated contributions
To get the most out of your TFSA, I highly recommend creating automated contributions. These can be changed and updated or even cancelled at any time. But if you can do it, putting in even just $50 or as much as $500 can be the difference between maxing out your TFSA and having no passive income in retirement.
Let’s say your goal is to put away the maximum limit each year, usually about $6,500. That would mean putting in automated contributions of $541 each month. If you’re making a salary of $60,000, that’s 10.8% you’re putting towards your future each and every month!
Now, for the good part.
Invest, then reinvest
If you want to make enormous passive income, it’s going to mean two things. First, you need to invest in a solid dividend stock. Then, you’ll need to reinvest the dividend income from that dividend stock to create more returns and passive income over time.
Let’s use the example of Brookfield Renewable Partners (TSX:BEP.UN). This stock is a good option as the company is moving well towards the renewable energy future, with plenty of assets on hand in every type of renewable energy sector. However, shares are down 26% in the last year thanks to the ongoing poor market.
Therefore, you can get a strong stock with a solid future with a 6.31% dividend yield right now. And here is what $6,500 could bring in with just a year invested should the stock reach 52-week-highs once more.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY | TOTAL PORTFOLIO |
| BEP.UN – now | $29 | 224 | $1.82 | $407.68 | quarterly | $6,500 |
| BEP.UN – highs | $44 | 224 | $1.82 | $407.68 | quarterly | $9,856 |
In just a year, you’ll have passive income from dividends and returns of $407.68 and $3,356, respectively! That’s total passive income of $3,763.68. And as you continue to reinvest this passive income year after year, you’re only going to see it climb. After a few decades, you’ll have an enormous amount of passive income in place. All from keeping consistent and adding it to your TFSA.
