Canadian seniors are using their self-directed Tax-Free Savings Account (TFSA) to build portfolios that can deliver steady tax-free passive income. The challenge is to find a way to get a decent yield without taking on too much capital risk.
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TFSA limit
The TFSA limit in 2025 is $7,000. This brings the cumulative maximum TFSA contribution space to $102,000 per person. A retired couple, therefore, would have as much as $204,000 in combined TFSA room. That’s adequate to build a good stream of tax-free passive income on savings.
Seniors who collect Old Age Security (OAS) should consider holding income-generating investments inside a TFSA before using a taxable trading account. The CRA does not count TFSA income when calculating net world income used to determine the OAS pension recovery tax. Retirees who collect good company pensions and full CPP and OAS need to keep an eye on the net world income threshold for the OAS clawback. The number to watch in 2025 is $93,454.
Best TFSA investments for income
Holding a mix of Guaranteed Investment Certificates (GICs) and dividend stocks is a popular strategy for generating TFSA passive income.
GIC rates rose as high as 5% to 6% in 2023 when the Bank of Canada aggressively raised interest rates to get inflation under control. The pause in rate increases and the start of rate cuts in 2024 ended the GIC party.
At the time of writing, investors can get non-cashable GICs paying 3% to 3.75% from Canada Deposit Insurance Corporation members, depending on the issuer and the term. This is still comfortably above the May 2025 inflation rate of 1.7%, so it is a decent, no-risk return.
The downside of a non-cashable GIC is that the funds are locked up for the term of the certificate. The rate received is fixed, and rates on offer at maturity could be lower.
Dividend stocks can provide much higher yields, but there is a risk that the share price will drop below the purchase price. Dividends can also be cut if a company gets into financial trouble. That being said, investors can find solid dividend-growth stocks that have increased distributions annually for decades. Each dividend hike raises the yield on the initial investment. In addition, stocks can be sold at any time to access the capital, if needed. Stocks that deliver long-term dividend growth usually recover from market downturns.
Enbridge (TSX:ENB) is a good example of a top Canadian dividend-growth stock that also offers an attractive yield today.
The energy infrastructure giant increased the dividend in each of the past 30 years. Enbridge’s $28 billion capital program should drive earnings growth to support ongoing dividend hikes over the medium term. Investors who buy ENB stock at the time of writing can get a dividend yield of 6.1%.
The bottom line on TFSA passive income
The best mix of GICs and dividend stocks is different for every investor, depending on required returns, need for access to the capital, and risk tolerance. In the current market conditions, it is quite easy to put together a diversified portfolio of GICs and quality dividend stocks to earn an average yield of at least 4.5%. That’s a solid risk-reduced return that still offers upside potential.
