Canadian investors are searching for ways to get better returns on their hard-earned savings without having to hand more over to the tax authorities. One popular strategy for generating tax-free passive income involves holding Guaranteed Investment Certificates (GICs) and high-yield dividend stocks inside a self-directed Tax-Free Savings Account (TFSA).
TFSA limit increase
Canada launched the TFSA in 2009 to give people a new savings option that provides more flexibility than a Registered Retirement Savings Plan (RRSP) while also giving Canadians a tax break on the income generated by the invested funds.
The TFSA limit increases every year and the size of the limit grows in $500 increments, linked to inflation. In 2024, the TFSA limit is $7,000. That’s up from the $6,500 limit in 2023. Unused contribution limits can be carried forward. The current maximum cumulative TFSA contribution space since inception is $95,000.
Money that is removed from a TFSA opens up equivalent new contribution space in the following year. All interest, dividends, and capital gains generated inside a TFSA are tax-free and can be fully reinvested or taken out as tax-free income.
Seniors don’t have to worry about TFSA income causing them to be hit by the Old Age Security (OAS) pension recovery tax that kicks in when net world income tops a minimum threshold. The Canada Revenue Agency (CRA) does not use TFSA earnings when it makes the net world income calculation for the OAS clawback. This is why it makes sense for retirees with high pension income to own income-generating investments inside a TFSA rather than in a taxable account.
Good investments for TFSA passive income
Investors who don’t want to put their savings at risk of potential losses should probably stick with GICs issued by Canada Deposit Insurance Corporation (CDIC) members. The steep rise in interest rates in Canada in the past couple of years has led to a jump in GIC rates offered by financial institutions. At the time of writing, it is easy to get a non-cashable GIC paying more than 5% for a term of one year and above 4.4% for terms up to five years.
Investors who want better yields and can handle the volatility of the stock market might consider adding top TSX dividend stocks to the mix. A number of leading Canadian dividend payers now trade at discounted prices and offer high yields.
Bank of Nova Scotia (TSX: BNS), for example, trades near $68 per share compared to $93 at the 2022 high.
Investors who buy BNS stock at the current level can get a 6.2% dividend yield.
Telus (TSX: T) is another great Canadian dividend stock that might be undervalued today. The board has increased the dividend for more than 20 consecutive years. Telus trades near $22 per share compared to more than $34 at one point in 2022. The current dividend yield is 6.75%.
The bottom line on top investments for TFSA passive income
The best mix of GICs and dividend stocks depends on a person’s risk tolerance, need for access to capital, and desired returns. An investor can quite easily build a diversified portfolio of laddered GICs and top TSX dividend stocks to get an average yield of 5.25% right now. A TFSA of $95,000 would generate an annual tax-free passive income of $4,987.50 that can go right into your pocket.
