Retirees: How to Use a TFSA to Generate Tax-Free Income and Avoid the OAS Clawback

These high-yield stocks have increased their dividends annually for decades.

Canadian retirees are taking advantage of their Tax-Free Savings Account (TFSA) to build portfolios of top TSX dividend stocks to generate tax-free passive income that won’t trigger or increase the Old Age Security (OAS) pension recovery tax.

Hand Protecting Senior Couple

Source: Getty Images

OAS clawback

Seniors who collect OAS should consider maximizing their TFSA space before holding income-generating investments in taxable accounts. Interest, dividends, and capital gains earned inside the TFSA and removed as income do not get added to the net-world income calculation the Canada Revenue Agency uses to determine the OAS pension recovery tax.

The OAS clawback, as it is commonly known, kicks in when net world income tops a minimum threshold. The number to watch in the 2025 income year is $93,454. Every dollar of net world income above that amount triggers a $0.15 reduction in OAS payments in the following year. For example, a senior with net world income of $103,454 in 2025 would see their total OAS reduced by $1,500 for the July 2026 to June 2027 payment period.

The TFSA limit in 2025 is $7,000. This brings the lifetime maximum contribution space to $102,000 for anyone who has qualified since the launch of the TFSA in 2009. A retired couple would have as much as $204,000 in TFSA room to generate tax-free income.

Dividend-growth stocks

Guaranteed Investment Certificate rates are down from a high of 6% in late 2023 to below 4% right now. As a result, many retirees are moving back into dividend stocks to get better yields. Owning stocks carries capital risk. The share price can fall below the purchase price, and sometimes dividends get cut if a company runs into cash flow issues.

That being said, good dividend stocks normally bounce back from market corrections, and dividend growth steadily increases the yield on the initial investment. Stocks also provide flexibility. Shares can be sold to get immediate access to the funds if there is a need for extra cash.

Enbridge

Enbridge (TSX: ENB) raised its dividend in each of the past 30 years. The energy infrastructure giant has a diversified asset portfolio that generates steady revenue and cash flow. Pipelines, utilities, and renewable energy are all part of the mix.

Enbridge has the financial clout to make large acquisitions to boost growth, as investors saw with the US$14 billion purchase last year of three American natural gas utilities. The company also has $28 billion in capital projects on the go that will drive added earnings expansion in the coming years.

Enbridge is up 28% in the past year, but the stock still provides a 5.9% dividend yield at the time of writing.

Canadian Natural Resources

Canadian Natural Resources (TSX: CNQ) is down about 18% in the past year due to weaker oil prices. The dip gives income investors with a stomach for volatility a chance to buy CNRL at a discount while the oil market faces some headwinds.

Analysts broadly expect oil prices to remain under pressure through 2025 and into next year due to weak demand in China and strong supply growth from countries like Canada and the United States. That being said, news of a trade deal between the U.S. and China could quickly change market sentiment. Supply disruptions in the Middle East could also send oil prices higher.

CNRL remains very profitable at current oil prices and is boosting production. The natural gas business is enjoying higher prices, which helps offset the lower oil margins. The board raised the dividend earlier this year, making this the 25th consecutive annual increase. Investors who buy CNQ stock at the current level can get a dividend yield of 5.5%.

The bottom line

Enbridge and CNRL pay attractive dividends that should continue to grow. If you have some cash to put to work, these stocks deserve to be on your radar.

The Motley Fool recommends Canadian Natural Resources and Enbridge. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker has no position in any stock mentioned.

More on Retirement

man shops at grocery store
Dividend Stocks

Choice Properties Pays Monthly: Does the Yield Compensate for Higher Rates?

Choice’s yield deserves a closer look at cash after property spending and financing costs.

Read more »

A meter measures energy use.
Energy Stocks

Canadian Utilities vs. Hydro One: Which Dividend Stock Would I Hold for 15 Years?

A proposed merger changes the Canadian Utilities comparison, while Hydro One still requires price discipline.

Read more »

pig shows concept of sustainable investing
Stocks for Beginners

How I’d Turn Quarterly Bank Dividends Into a Monthly Paycheque

Quarterly bank dividends can fund regular monthly transfers without choosing stocks for payment dates.

Read more »

man calculates finances
Dividend Stocks

How to Structure a $50,000 TFSA for Consistent Monthly Income

Structure a $50,000 TFSA for consistent monthly income with Scotiabank, RioCan and ZWC. Explore an allocation targeting about $200 a…

Read more »

House models and one with REIT real estate investment trust.
Dividend Stocks

Canadian Apartment Properties vs. Killam: Which Rental Stock Would I Buy?

CAPREIT gets a narrow preference on starting income and valuation, with Killam offering a different regional mix.

Read more »

woman stares at chocolate layer cake
Dividend Stocks

Starting With $10,000 at 40: How I’d Build Future Retirement Income

A $10,000 start becomes more powerful when monthly contributions join reinvested returns.

Read more »

dividend stocks are a good way to earn passive income
Energy Stocks

Freehold Royalties vs. Whitecap: Which Energy Stock Fits an Income Portfolio?

Freehold supplies more starting income, while Whitecap offers a different route through production growth.

Read more »

woman relaxes with phone
Dividend Stocks

BCE Cut its Dividend: Has the Stock Become a Better Income Investment?

BCE’s new payment offers income, but cash after spending still has to support the recovery.

Read more »