The Canada Revenue Agency, or CRA, has their hands in the pockets of tax-paying citizens like us. It’s a necessary downside to living in this great country but also one that can be managed. Tax-saving strategies, like maximizing your Tax-Free Savings Account, or TFSA, can put significant amounts of money back in your wallet.
Here are two stocks to buy to earn tax-free dividend income and capital gains that the CRA can’t touch.
Enbridge: A 7.65% yield means there are a lot of CRA savings to be had
I’ve said it before, and I’ll say it again: Enbridge (TSX:ENB) is one of the most interesting opportunities for investors today. With its 7.65% yield and its standing as one of Canada’s top energy infrastructure companies, investors would do well adding it to their TFSA.
Let’s start with the dividend. Enbridge’s annual dividend of $3.55 per share is one that has been reliable and consistent over time. It’s also been growing over time. In fact, Enbridge has 28 years of annual dividend increases under its belt. During this time period, its annual dividend has grown at a compound annual growth rate (CAGR) of 7.25%. Essentially, the dividend today is 1,320% higher than it was in 1995.
So, let’s consider the implications of this. As we know, the CRA always gets a chunk of our investment income through taxation. Dividend income has a lower tax rate, but the taxation still adds up. For example, let’s assume you own 500 shares of Enbridge. This would translate into $1,775 of annual dividend income. Assuming your federal marginal tax rate is 29% and your provincial tax rate is 15%, your annual tax bill would be $465 for the dividends received.
This taxation amount adds up quickly over the years and as the money invested increases. Over five years, your tax payments to the CRA would amount to $2,325; over 10 years, your payments would amount to $4,650; and so on. While this rate is more attractive than the tax rate on interest income, it’s even more attractive to shelter it in a TFSA and skip the CRA payment altogether.
BCE: Canada’s telecom company is yielding 7.19%
When looking for stocks to buy in your TFSA, BCE (TSX:BCE) is another stock that I think we should all consider. Canada’s leading telecom company boasts an unmatched network, with the fastest and farthest-reaching broadband internet connection. Also, BCE has a leading position in fibre optics and 5G, which is on track to grow to 85% penetration in Canada.
All of this will continue to support the business and the dividend. In BCE’s latest quarter, cash flow from operations increased 18% to just over $2 billion. Over the last five years, BCE’s annual cash from operations has grown 12.6% to $8.3 billion.
Like Enbridge, BCE is a leading company with stable and growing cash flows and dividends. In fact, BCE’s dividend is 223% higher than it was in 2000, and it’s grown at a CAGR of 6.22% during this time period.
Buying BCE stock for your TFSA will shelter these dividends from the CRA’s tax bill. If you own 500 shares of BCE, your annual dividend income would be $1,935. Owning this dividend stock in your TFSA would allow you to skip the $507 annual CRA tax payment. And this is how to earn big TFSA income that the CRA can’t touch.