Canadian retirees and other income investors are searching for ways to get better returns on their hard-earned savings without being bumped into a higher tax bracket or getting hit with the Old Age Security (OAS) pension recovery tax.
TFSA benefits
A good way to generate tax-free passive income is to hold income-generating investments inside a Tax-Free Savings Account (TFSA).
All interest, dividends, and capital gains earned from a TFSA investment portfolio are tax-free. This means the full amount of the TFSA income can be reinvested or removed without worrying about the need to share it with the Canada Revenue Agency (CRA).
The TFSA contribution limit for 2024 is $7,000, bringing the cumulative total TFSA contribution room to $95,000 for anyone who has qualified every year since the TFSA began in 2009. As a result, retired couples currently have as much as $190,000 in TFSA space to generate tax-free passive income on their savings.
TFSA withdrawals open up equivalent new contribution space in the following calendar year in addition to the regular TFSA limit.
OAS clawback
Income from work pensions, government pensions, investments held in taxable accounts, withdrawals from a Registered Retirement Savings Plan (RRSP) or from a Registered Retirement Income Fund (RRIF) are all taxable. This is tough on retirees, despite having decent retirement income, because they have to give back a large chunk of it in the form of income tax.
In addition, pensioners who receive OAS can be hit with an OAS clawback if their net world income tops a minimum threshold. The amount to watch in the 2024 income year is $90,997. Every dollar of income above this amount triggers a 15-cent cut in the total OAS that will be paid next year. For example, a person with a net world income of $100,997 in 2024 will see their OAS reduced by $1,500 for the July 2025 to June 2026 payment period.
Good TFSA investments for passive income
Rates paid on Guaranteed Investment Certificates (GICs) are falling now that the Bank of Canada has started to cut interest rates. That being said, investors can still get non-cashable GIC rates above 4% for terms up to 5 years. That’s not bad for a no-risk investment.
Dividend stocks that took a beating over the past two years could rebound as interest rates decline. At the moment, investors can get great yields from some top TSX dividend-growth names.
TC Energy (TSX:TRP) for example, has increased its dividend in each of the past 24 years.
Now trading near $52, the stock is off the 12-month low of around $44 but still trades at a large discount to the $74 it reached in 2022. Investors who buy TRP stock at the current level can get a 7.4% dividend yield.
Enbridge (TSX:ENB) raised its dividend in each of the past 29 years. The stock trades near $47.50 at the time of writing compared to $59 two years ago. Investors can get a dividend yield of 7.7% right now from ENB stock.
The bottom line on TFSA passive income
Investors can quite easily create a diversified portfolio of GICs and top Canadian dividend stocks that would generate an average yield of 5.25% right now. On a TFSA of $95,000, this would provide $4,987.50 per year in tax-free passive income. That averages out to more than $415 per month.
