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 started investing during the 2017 marijuana stock bubble. After incurring some hilarious losses on various poor stock picks, he now adheres to Bogleheads-style passive investing strategies using index ETFs. Tony graduated in 2023 from Columbia University with a Master's degree in risk management. He holds the Certified ETF Advisor (CETF®) designation from The ETF Institute. Tony's work has also appeared in U.S. News & World Report, USA Today, NYSE ETF Central, NASDAQ Fundinsight, Cboe ETF Market, TheStreet, and Benzinga. He is the founder of ETF Portfolio Blueprint (https://etfportfolioblueprint.com)

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.

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.