Canadian seniors who collect Old Age Security (OAS) are at risk of being hit by the OAS pension recovery tax if their income is too high in a given year. One popular strategy to reduce or avoid the OAS clawback is to generate income inside a Tax-Free Savings Account (TFSA).
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TFSA 101
Canada created the TFSA in 2009 to give people another tool to build savings for future financial goals. Since inception, the cumulative maximum TFSA contribution space per person has grown to $102,000, including the 2025 TFSA limit of $7,000.
All interest, dividends, and capital gains earned inside the TFSA are tax-free. This means the full amount of the income can be removed as income or reinvested without the need to set some aside for the Canada Revenue Agency (CRA). Funds withdrawn from a TFSA open up equivalent new contribution room in the following calendar year. This is in addition to the regular annual TFSA limit.
The current $102,000 contribution space is enough for individuals and couples to build considerable investment portfolios that can generate tax-free passive income. All TFSA investors can benefit, but seniors get the added bonus of not having to worry about the TFSA income triggering a reduction in their OAS pension payments.
OAS clawback basics
The CRA implements a 15% OAS pension recovery tax on every dollar of net world income that is above a minimum threshold. The number to watch in the 2025 income year is $93,454. Every dollar in net world income above that amount triggers a $0.15 reduction in OAS paid for the next 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.
Retirement income above $90,000 sounds like a lot, but a person who collects a decent company pension, CPP, OAS, and investment income or earnings from a side hustle can easily reach that amount. As such, it makes sense for most retirees to maximize their TFSA contribution space to hold income-generating investments before buying investments inside taxable investment accounts.
Top TFSA investments for passive income
Retirees who don’t want to take on any capital risk can simply hold Guaranteed Investment Certificates (GICs) inside their TFSA to generate income. Non-cashable GICs offer the best rates, but they lock up the funds for the term of the certificate. GIC rates rose as high as 6% in late 2023. They then fell as interest rates and bond yields declined. At the time of writing, GIC rates above 3.5% are still available from Canada Deposit Insurance Corporation (CDIC) members, depending on the term and the issuer. With inflation still below 2% in Canada, the 3.5% return from a GIC remains attractive.
Dividend stocks are another popular option for generating TFSA passive income, but owning shares of companies comes with risk. The stock price can fall below the purchase price, and dividends are not 100% safe. Sometimes firms have to cut the dividend payment to preserve cash during difficult times.
That being said, a number of top Canadian dividend stocks have given investors an increase annually for decades and should continue to grow their payouts. Each dividend increase raises the yield on the initial investment. In many cases, dividend yields are higher than current GIC rates. Stocks can be sold at any time to access the capital in case of an emergency need for the funds.
Enbridge (TSX:ENB) is a good example of a top TSX dividend stock to consider for a TFSA focused on passive income. The board raised the dividend in each of the past 30 years, and dividend growth should continue, supported by earnings expansion and rising distributable cash flow.
Enbridge trades near $61.50 at the time of writing, compared to the 2025 high above $65. At the current share pric,e the dividend provides a yield above 6%.
The bottom line
Retirees can use the TFSA to generate passive income that won’t cause an OAS clawback. The right mix of GICs and dividend stocks depends on a person’s desired yield, risk tolerance, and need for quick access to the funds.
