Canadian savers are taking advantage of their self-directed Tax-Free Savings Account (TFSA) limit to build portfolios of investments that generate steady streams of passive income to complement company pensions and government pensions in retirement.
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TFSA limit growth
The TFSA limit in 2024 is $7,000. This brings the cumulative maximum contribution space to $95,000 per person since the TFSA’s inception in 2009. The government increases the size of the annual TFSA limit in $500 increments based on inflation. The limit rose from $6,500 in 2023 to $7,000 in 2024, so the 2025 TFSA limit will likely be $7,000, given the trending rate of inflation this year.
All interest, dividends, and capital gains generated on qualifying Canadian investments inside the TFSA are not taxed. In addition, the Canada Revenue Agency does not count TFSA earnings when calculating the Old Age Security (OAS) pension recovery tax, which kicks in when seniors who collect OAS have net world income that tops a minimum threshold. That amount is $90,997 for the 2024 income year. Every dollar of net world income above the threshold triggers an OAS clawback of 15 cents. For example, a senior with a net world income of $100,997 in 2024 would see their OAS reduced by $1,500 for the July 2025 to June 2026 payment period.
This is a big hit and should be avoided where possible. Maximizing TFSA contribution space instead of using a taxable account to hold income-generating investments can help reduce or avoid the OAS clawback.
TFSA investments for income
A popular strategy for generating passive income inside a TFSA while reducing risk involves diversifying investments between Guaranteed Investment Certificates (GICs) and Canadian dividend stocks. Rates on GIC have dropped considerably in the past year due to the reduction in interest rates by the Bank of Canada. That being said, investors can still get non-cashable GIC rates in the 3.5% to 4% range from most Canada Deposit Insurance Corporation (CDIC) members.
Dividend stocks that took a beating in 2022 and 2023 are recovering as yield investors shift out of fixed income. However, a number of good Canadian dividend stocks still trade below their 2022 highs and offer decent yields.
Bank of Nova Scotia (TSX: BNS), for example, trades near $73 at the time of writing compared to $93 in early 2022.
Falling interest rates should help stabilize Bank of Nova Scotia’s provisions for credit losses (PCL) in the coming months and then lead to lower PCL or even provision reversals next year as borrowers with too much debt get some relief on their interest charges. This would boost profits and can free up more cash for distributions.
At the time of writing, Bank of Nova Scotia stock provides a dividend yield near 5.8%.
The bottom line on TFSA passive income
Investors can quite easily put together a diversified portfolio of GICs and Canadian dividend stocks to generate an average yield of 4.5% today. In a TFSA of $95,000, this investment would provide $4,275 per year in tax-free passive income.
