Canadian pensioners are taking advantage of their Tax-Free Savings Account (TFSA) contribution room to build investment portfolios that can generate steady tax-free passive income.
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TFSA 101
Canada launched the TFSA in 2009 to give people another option to build savings for financial goals. The TFSA limit in 2024 is $7,000 and will likely be $7,000 again in 2025. Since inception, the cumulative maximum TFSA contribution room per person is currently $95,000. That means a retired couple would have as much as $190,000 in investment space to generate income that doesn’t have to be shared with the government.
All interest, taxes, and dividends earned inside the TFSA on qualifying investments are tax-free and can be removed as income or reinvested. In addition, the CRA does not count TFSA earnings towards the net world income calculation used to determine the Old Age Security (OAS) pension recovery tax. This kicks in when a person who collects OAS has net world income that breaches a minimum threshold. The number to watch in the 2024 tax year is $90,997. Every dollar in income above that amount triggers a $0.15 reduction in the total OAS paid out in the next year. For example, a senior with net world income of $110,997 in 2024 would be hit with an OAS clawback of $3,000 in the July 2025 to June 2026 payment period.
One way to minimize the OAS clawback is to make sure available TFSA contribution room is fully used before holding income-generating investments in a taxable investment account.
Good TFSA investments for income
Rates offered on guaranteed investment certificates (GICs) have dropped considerably over the past year and now range from 3% to 4% depending on the term and the provider. That’s still not bad for investors who want zero risk and don’t need higher yields.
Investors who want better returns and can handle the volatility that comes with owning shares of companies might decide to buy dividend-growth stocks. Share prices can fall below the purchase price, and dividends sometimes get cut if a company gets into financial trouble. However, a number of top Canadian dividend stocks have paid distributions for decades and tend to increase the payouts at a steady pace.
Fortis (TSX: FTS) is a good example of a dividend-growth stock. The board has increased the distribution annually for the past 50 years.
Fortis is working on a five-year $25 billion capital program that is expected to increase the rate base from $37 billion to $49.4 billion by 2028. As new assets go into service, the boost to cash flow should support planned annual dividend increases of 4% to 6%. At the time of writing, Fortis provides a dividend yield of 4.1%.
Enbridge (TSX: ENB) is another stock with good dividend growth. The board increased the dividend in each of the past 29 years. Investors who buy ENB stock at the current level can get a dividend yield of 6.5%.
The bottom line on TFSA passive income
Seniors can quite easily put together a diversified portfolio of GICs and stocks to get an average yield of 5% today. On a TFSA of $95,000, this would generate $4,750 per year per person (or $9,500 per couple) in tax-free passive income that won’t put OAS at risk of a clawback.
