Canadians are taking advantage of their self-directed Tax-Free Savings Account (TFSA) to build portfolios that can generate steady passive income to complement the Canada Pension Plan (CPP), Old Age Security (OAS), and company pensions.
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TFSA limit 2026
The TFSA limit is $7,000 in 2026. This brings the cumulative maximum TFSA contribution room to $109,000 for anyone who has qualified since the creation of the TFSA in 2009.
The TFSA offers Canadians a lot of flexibility and benefits. Unused TFSA space can be carried forward, so there is no concern about the need to maximize the contribution every year. Withdrawals made from the TFSA open up equivalent new contribution room in the following calendar year, in addition to the regular contribution limit.
All dividends, interest, and capital gains generated inside the TFSA can be withdrawn as tax-free income or fully reinvested. The CRA does not take a cut of the profits. This is particularly helpful for retirees who collect OAS. The CRA does not count TFSA income towards the net world income calculation used to determine the OAS pension recovery tax that kicks in when net world income tops a minimum threshold.
GICs or dividend stocks for TFSA income?
Rates offered on Guaranteed Investment Certificates (GICs) have recently moved higher, in step with rising bond yields. At the time of writing, investors can get non-cashable GICs in the 3% to 4% range, depending on the issuer and the term. Inflation in Canada is currently close to 2%, so it makes sense to consider GICs for an income portfolio. In most cases, investors can choose to have the interest paid monthly, semi-annually, annually, or compounded.
As long as the GIC is issued by a Canada Deposit Insurance Corporation (CDIC) member and the amount of the GIC investments with the issuer is within the 100,000 limit, the investment is guaranteed. The downside of a GIC is that the best rates are available on non-cashable certificates, so the cash is locked up for the term of the GIC. In addition, the rate is fixed for the term and rates available for renewal when the GIC matures could be lower.
Dividend stocks often provide higher yields than the rates that are offered on GICs. Owning stocks, however, comes with risk. The share price can fall below the purchase price, and dividends could be cut or eliminated if the business faces cash flow issues. On the positive side, many companies raise their dividends regularly, so the yield on the initial investment increases each time there is a dividend hike. Stocks also provide good liquidity as they can be sold at any time to access the capital. In addition, good companies with steady dividend growth tend to see their share prices rise over time. Dividends are normally paid quarterly, although some companies provide monthly payments.
Enbridge (TSX:ENB) is a good example of a dividend-growth stock that offers an attractive 5.1% yield today.
The energy infrastructure giant has increased the dividend in each of the past 30 years and has a large capital program in place that should support ongoing dividend growth.
The bottom line
Investors have to determine their risk appetite, required return, and need for access to the invested capital when deciding on the mix between GICs and dividend stocks. In the current market conditions, it is possible for investors to build a diversified portfolio of GICs and dividend stocks to get an average yield of 4%. On a TFSA of $109,000, this would generate $4,360.00 per year in tax-free income. That works out to $363.33 per month.
