The Tax-Free Savings Account (TFSA) is a great investing tool for retired couples to use to generate income to complement CPP, Old Age Security (OAS), and company pensions.
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TFSA benefits
The TFSA contribution space in 2025 is $7,000. This brings the cumulative maximum contribution room to $102,000 per person for anyone who has qualified since the inception of the TFSA in 2009. This means a retired couple would have as much as $204,000 in TFSA space to generate tax-free income on their investments.
All interest, dividends, and capital gains earned inside a TFSA are tax-free. Retirees can remove the full amount of the income without being concerned that it will push them into a higher tax-bracket or trigger a clawback in OAS payments. The CRA does not include TFSA income when calculating the OAS pension recovery tax that kicks in when net world income exceeds a minimum threshold. In the 2025 income year, the number to watch is $93,454.
Any amount removed from the TFSA during the year opens up an equivalent amount of contribution room in the following calendar year, in addition to the regular TFSA limit amount. This is good for retirees who might decide to take some extra cash out of the TFSA for emergency expenses or a holiday and then replace the funds later.
GICs or dividend stocks
Rates offered on guaranteed investment certificates (GICs) briefly hit 6% two years ago at the peak of the cycle of interest rate hikes by the Bank of Canada. Since then, the central bank has reduced interest rates to support the economy. This has led to a drop in the rates investors can get from their financial institutions on GICs. At the time of writing GIC rates offered by Canada Deposit Insurance Corporation (CDIC) members range from about 3% to 3.5% for non-cashable certificates depending on the term and the provider.
The Canadian inflation report for October just came in at 2.2%. GIC rates are still comfortably above this level, so it makes sense to allocate some of the TFSA funds to this risk-free option. The downside of a GIC is that the rate is fixed for the term and, in the case of non-cashable GICs, the funds are locked up for the term of the certificate. In addition, the rates available when the certificate matures might be lower.
Owning dividend stocks carries capital risk. The share price can fall below the purchase price and dividends sometimes get cut if a company runs into cash flow issues. That being said, investors can find good TSX dividend stocks with long track records of distribution growth. Each increase to the dividend raises the yield on the initial investment. Stocks also provide more flexibility, as they can be sold at any time to access the capital.
Enbridge (TSX:ENB) is a good example of a TSX dividend-growth stock with an attractive yield.
The board raised the dividend in each of the past 30 years. Acquisitions and a large capital program should support ongoing dividend growth. Investors who buy ENB stock at the current price can get a dividend yield of 5.6%.
The bottom line
The right mix of GICs and dividend stocks is different for every TFSA investor depending on the required return, appetite for risk, and need for access to the capital. In the current market, investors can quite easily put together a diversified portfolio of GICs and quality dividend stocks to get an average yield of 4%. For a retired couple with combined TFSA holdings of $204,000, this would generate $8,160 per year in tax-free passive income.
