The Tax-Free Savings Account (TFSA) is like the secret weapon of passive income strategies in Canada. Since its inception in 2009, it’s become a favourite among Canadians for good reason. With a lifetime contribution limit of $95,000 as of 2024, all the investment gains you make are inside the TFSA. Whether from dividends, interest, or capital gains, it’s all completely tax-free. This means every dollar you earn stays in your pocket, compounding year after year, without the taxman taking a slice. It’s no wonder that by 2022, over 15 million Canadians had opened a TFSA, recognizing its potential to grow wealth efficiently.
Yet what makes the TFSA particularly appealing for passive income is the flexibility it offers. Unlike the Registered Retirement Savings Plan (RRSP), withdrawals are tax-free and don’t affect your taxable income. This makes it ideal for supplementing your earnings in retirement or covering unexpected expenses. Plus, any amount you withdraw gets added back to your contribution room the following year, so you never lose out on growth potential. So, how can investors take advantage?
Using a TFSA
The trick to creating long-term passive income with a TFSA is to choose investments that grow steadily and pay you back over time, like dividend stocks, exchange-traded funds (ETF), or bonds. Dividend stocks are particularly popular because they regularly pay out a portion of the company’s profits to shareholders, meaning you’re earning money without lifting a finger. Reinvest those dividends back into your TFSA, and you’re setting up a virtuous cycle of compounding growth. Over the years, those small payments can snowball into a substantial income stream, all tax-free.
To maximize your TFSA for long-term passive income, think beyond just picking stocks. Diversification is your best friend. By spreading your investments across different sectors and types of assets, you reduce risk while keeping your income streams flowing steadily. Consider mixing in some bond ETFs for stability or international stocks for global exposure. The key is to stay patient and let time work its magic. With regular contributions, smart investments, and a bit of discipline, your TFSA can grow into a robust source of income that supports your financial goals for years to come. Whether that’s a comfortable retirement, travel adventures, or just a little extra cushion for life’s surprises.
Consider NWC
The North West Company (TSX:NWC) is a great option in this case. It has been a staple in the Canadian retail sector, especially in servicing remote and rural communities. Looking back, NWC has enjoyed a strong, consistent track record of steady growth and reliable dividend payments. The company has skillfully navigated through various economic cycles, maintaining profitability and returning value to shareholders. However, with its focus on regions that are less economically developed, NWC has faced challenges such as high operating costs and exposure to currency fluctuations. These risks have sometimes put pressure on its margins, but the company’s resilience in managing these issues has kept investors confident.
Currently, NWC continues to offer a strong dividend yield at 3.5%, and has shown solid financial performance, with recent earnings growth and efficient cost management. The company’s strategy of expanding its footprint and enhancing operational efficiencies is paying off, evident from its increasing sales and profitability. Looking ahead, NWC’s ability to adapt to changing consumer needs and its focus on strategic growth make it an attractive option for investors seeking stable long-term returns. While the stock isn’t without risks, such as potential economic downturns impacting its customer base, the company’s strong market position and commitment to shareholder value present a compelling investment opportunity.
Bottom line
So let’s say this year you decided to put that $7,000 in contribution room in your TFSA towards NWC stock. You then see shares rise by another 46%, as we’ve seen in the last year alone. Here is what shares could potentially offer in passive income as of writing.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY | PORTFOLIO TOTAL |
| NWC – now | $45.20 | 155 | $1.56 | $241.80 | quarterly | $7,000 |
| NWC – 46% | $66 | 155 | $1.56 | $241.80 | quarterly | $10,230 |
You’ve now earned $241.80 a year in dividends, and $3,230 in returns! That’s total passive income at $3,471.80 in a year alone. And imagine what that could do long term.
