Canadians investors are using their self-directed Tax-Free Saving Account (TFSA) to generate tax-free passive income on their hard-earned savings. Current market conditions offer an opportunity for investors to get great returns from both Guaranteed Investment Certificates (GICs) and high-yield TSX dividend stocks.
TFSA limit
The Canadian government created the TFSA in 2009 as an alternative tool for people to put money aside to meet future financial goals. The TFSA limit increases every year. In 2024 the TFSA limit increased to $7,000. This brings the maximum cumulative total contribution space to $95,000 per person.
All interest, dividends, and capital gains earned inside the TFSA are tax-free and can go straight into your pocket or be reinvested to build the savings fund. This is great news for anyone who is in a high marginal tax bracket and would otherwise be hit with taxes on the earnings if the investments were held in a taxable account.
The flexibility of the TFSA is also attractive. Money can be removed at any time for an emergency. All withdrawals in a calendar year open up equivalent new TFSA contribution space in the following year.
Seniors get an added benefit. The TFSA income is not counted toward the Canada Revenue Agency’s net world income calculation that is used to determine the Old Age Security (OAS) pension recovery tax, also known as the OAS clawback.
Retirees who collect OAS have to keep an eye on their total taxable income coming from company pensions, OAS, Canada Pension Plan, Registered Retirement Income Fund payments, Registered Retirement Savings Plan withdrawals, and taxable investments, among other sources. In the 2024 income year, the number to watch is $90,997. Every dollar of net world income above this amount triggers a 15-cent reduction in the total OAS that will be paid in the July 2025 to June 2026 payment period. For example, a person with a net world income of $100,997 in 2024 would see their OAS clawed back by $1,500 in the next fiscal payment year.
This is why it normally makes sense for investors to maximize TFSA contributions before owning income-generating investments inside a taxable account.
TFSA investments for generating passive income
Investors who don’t want to take any risks can simply hold GICs inside the TFSA. Rates paid on GICs have come down in recent months, but investors can still get between 4% and 5% depending on the issuer and the duration of the GIC.
People who can handle some market turbulence and are seeking higher yields have an opportunity to buy some top TSX dividend-growth stocks at discounted prices right now.
Enbridge
Enbridge (TSX:ENB) is a good example of a high-yield dividend stock with a great track record of distribution growth. The board has increased the dividend annually for the past 29 years.
Enbridge is a giant in the energy infrastructure sector moving 30% of the oil produced in Canada and the United States. The company also has natural gas transmission and distribution assets, including utilities that generate steady cash flow. In addition, Enbridge is expanding its export holdings and continues to grow its renewable energy business.
Investors who buy Enbridge at the current price near $48 can get a 7.6% dividend yield. ENB stock was as high as $59 in 2022.
The bottom line on TFSA passive income
A diversified portfolio of GICs and top TSX dividend stocks could easily deliver an average yield of 5% today. On a TFSA portfolio of $95,000, this would generate $4,750 per year in tax-free passive income that won’t bump you into a higher tax bracket or put OAS payments at risk of a clawback.
