Passive income planning can get messy fast in a non-registered account. It is not as simple as taking a fund’s stated yield, multiplying it by your portfolio value, and calling it a day. That yield can change, and more importantly, taxes complicate everything.
Different types of income are taxed differently. Eligible dividends, non-eligible dividends, capital gains, foreign income, and return of capital all have their own rules. Once you factor that in, your “expected income” number can look very different after tax.
Inside a Tax-Free Savings Account (TFSA), all of that becomes irrelevant. That simplicity makes it much easier to plan around a target income number. And if you are not strictly using your TFSA for long-term compounding, it can be a tool for generating passive income.
That said, fund selection still matters. The goal should be to keep fees low and maintain diversification. Strategies that rely on leverage or covered calls can boost yield, but they often come with higher costs, more risk, and weaker long-term returns.
With that in mind, here is one possible way to structure a TFSA to generate about $4,360 per year in tax-free income using exchange-traded funds (ETFs).
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The ETF to use
The BMO Growth ETF (TSX: ZGRO) is an unorthodox starting point for a TFSA passive income investor.
It is an asset allocation ETF, meaning it holds a mix of underlying ETFs rather than individual stocks or bonds. The portfolio is roughly 80% global equities across Canada, the U.S., and international markets, and 20% global bonds.
That mix gives you growth potential along with some stability and income from the bond portion. The cost is also reasonable at a 0.18% expense ratio. The downside is yield.
On its own, ZGRO only yields about 1.4%, which is not particularly helpful if your goal is income. You could generate cash flow by selling units, but many investors are uncomfortable with that because it feels like drawing down principal.
That is where the target cash flow version comes in. ZGRO.T holds the exact same underlying portfolio as ZGRO, but it is structured to pay out a higher, more consistent monthly distribution.
BMO does this by combining the underlying dividends with realized capital gains and return of capital. The goal is to deliver a higher, more predictable cash flow, currently around a 5.4% yield.
How much do you need to invest?
Let’s break this down step by step. Your target is $4,360 per year in passive income.
First, convert that into a monthly number: $4,360 ÷ 12 = about $363.33 per month
ZGRO.T paid $0.058 per unit in March, and it was the same in January and February, so we will assume that level holds.
Now divide your monthly income target by the per-unit distribution: $363.33 ÷ $0.058 ≈ 6,264 units
Now multiply that by the current unit price: 6,264 × $12.98 ≈ $81,300
That means you would need roughly $81,300 invested to generate about $4,360 per year, or $363 per month, in tax-free income.
Just remember that ZGRO.T’s distribution payout is designed to be stable, but it is not guaranteed, and the underlying portfolio value will still fluctuate with the market.
