How to Use Your TFSA to Create $5,000 in Tax-Free Passive Income

Every share of this TSX income fund you buy will pay $0.10 a month in distributions.

Key Points
  • EIT.UN is a closed-end fund with a steady $0.10 monthly payout, making it well suited for TFSA income strategies.
  • To generate $5,000 per year in tax free income, you’d need roughly 4,167 units, or about $64,400 invested at recent prices.
  • Because of its distribution mix, holding EIT.UN inside a TFSA keeps the income simple and fully tax free.

Planning reliable investment cash flow is much easier when you combine two tools: a Tax-Free Savings Account (TFSA) and a closed-end fund (CEF).

The first one is intuitive — the TFSA shelters capital gains and income from taxes when withdrawn. The second one is less familiar to many Canadians because CEFs behave differently from dividend stocks and exchange-traded funds (ETFs).

Some CEFs are designed specifically for income. A standout example is the Canoe EIT Income Fund (TSX: EIT.UN), which uses a managed distribution policy to keep monthly payouts steady. That makes it attractive for investors building predictable passive income streams.

Here’s how the fund works and the simple math behind how much you’d need to invest to generate $5,000 per year — or about $416 per month — in completely tax-free passive income inside a TFSA.

Blocks conceptualizing Canada's Tax Free Savings Account

Source: Getty Images

What is EIT.UN?

Despite being marketed primarily as an income fund, EIT.UN has delivered strong total returns. With dividends reinvested, it has produced a 10-year annualized total return of about 12.6%.

Its hallmark is a steady managed distribution of $0.10 per unit each month, or $1.20 per unit annually, which works out to a yield of roughly 7.8% based on recent prices. That payout is a mix of capital gains, dividends, and return of capital, which is why it is much easier to hold the fund in a registered account like a TFSA.

Behind that distribution is a bottom-up portfolio of roughly 40 Canadian and U.S. stocks, split roughly 50/50. The fund is actively managed and can use up to 1.2 times leverage, which means it is allowed to modestly borrow to enhance returns. You are not just buying a static basket of stocks but an actively run portfolio aimed at sustaining both income and growth.

Structurally, EIT.UN is a closed end fund. It has a fixed number of units that trade on the stock market, rather than creating and redeeming units each day like a regular ETF. At the moment, it trades at a small discount to its net asset value, with the market price around $15.46 compared to a NAV near $15.75.

EIT.UN dividend math

The monthly payout is $0.10 per unit, or $1.20 per unit annually. To earn $5,000 per year in tax free passive income, you start by dividing your income target by the annual payout. That is $5,000 divided by $1.20, which works out to roughly 4,167 shares.

Using a recent market price of about $15.46 per unit, you multiply 4,167 by $15.46. That comes out to roughly $64,400 that would need to be invested in the fund to produce $5,000 per year, or about $416 per month, in distributions. Inside a TFSA, that income would arrive without any tax bill.

To receive EIT.UN’s monthly distribution, you must own units before the ex dividend date. For example, you would need to be a unitholder before November 21 to receive the December 15 payment. The pattern repeats each month, so it is worth noting the ex dividend date on your calendar if you are planning a purchase.

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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