How to Use Your TFSA to Earn $3,600 per Year in Passive Income

This TSX-listed income fund has been paying steady monthly distributions for decades.

Tony Dong, MSc, CETF®

Tony turned a series of 2017 marijuana stock losses into a freelance career advocating for ETF investing. He currently holds a Master’s in Risk Management from Columbia University and is a Certified ETF Advisor (CETF®). Tony is the founder of ETF Portfolio Blueprint (etfportfolioblueprint.com) and the Lead ETF Analyst for ETF Central, a partnership between Trackinsight and the NYSE. His analysis has also been featured in publications like Kiplinger, 24/7 Wall St., U.S. News & World Report, TheStreet, and Benzinga. Tony also provides independent content and marketing consulting services to various Canadian and U.S. ETF issuers. His editorial opinions for The Motley Fool remain independent and objective.

Published August 22, 2024 7:00 pm EDT

If you’re looking to optimize your Tax-Free Savings Account (TFSA) for tax-free passive income, you might typically consider dividend stocks with high yields. However, there’s a more time-tested option available – closed-end funds.

One standout example is the Canoe EIT Income Fund (TSX.EIT.UN), Canada’s largest closed-end fund with over $2.8 billion in assets under management and a long history of steady monthly distributions.

In this guide, I’ll show you how to use this EIT.UN to generate $3,600 a year, or $300 a month, in tax-free passive income using your TFSA.

Piggy bank with word TFSA for tax-free savings accounts. — Source: Getty Images

What is EIT.UN?

EIT.UN trades like a stock but offers a diversified portfolio, holding a mix of roughly 50% U.S. and 50% Canadian stocks. The top 25 holdings of the fund, which make up 77.6% of its total assets as of July 30, are listed below.

The primary goal of EIT.UN is income generation. It aims to provide a steady monthly distribution of $0.10 per share, which is composed of dividends, capital gains, and return of capital.

It’s important to note that as a closed-end fund (CEF), EIT.UN can use leverage to enhance returns, typically around 20% or 1.2 times, which also increases risk. I expect EIT.UN to be more volatile than your average exchange-traded fund (ETF).

Another aspect to consider is the trading price relative to its net asset value (NAV). As of August 15, the NAV per share is $14.61, while it trades at $14.28, representing a discount. Investors generally look to buy shares at a discount to NAV.

Over the last decade and since inception, EIT.UN has significantly outperformed the S&P/TSX Composite Index with distributions reinvested, as illustrated in the performance comparison below.

How much do you need to invest?

Assuming EIT.UN’s most recent August 15th monthly distribution of $0.10 and the current share price at the time of writing of $14.28 remained consistent moving forward, an investor using a TFSA would need to buy roughly $42,840 worth of EIT.UN, corresponding to 3,000 shares to receive around $300 monthly tax-free.