How to Use Your TFSA to Average $2,500 Per Year in Tax-Free Passive Income

Discover how to maximize your TFSA through strategic dividend stock investments for tax-free gains and regular income.

Puja Tayal

Author Bio

Puja Tayal grew up in a small-business family where dinner conversations often centred on working capital and savings. Her early experiences with investing, particularly during the 2008 financial crisis, shaped her approach to understanding markets and evaluating investment opportunities. She began her career at a mutual fund company before moving into investor education and financial writing for asset and wealth management firms. Before joining The Motley Fool, Puja wrote for Market Realist, where she extensively covered the semiconductor industry. Her published work has also appeared in The Indian Express. Puja believes every stock has a story that can help investors understand its potential returns. She combines business analysis with different investing approaches to help investors make informed decisions and align their portfolios with their long-term financial goals. Outside of finance, Puja enjoys long drives, catching up with friends, watching superhero and science-fiction movies, and managing her family portfolio. She also has a keen interest in artificial intelligence and its potential to reshape the world.

Education

Bachelor's degree in Accounting and Finance, University of Mumbai (2007)
CFA Level I

Areas of Expertise

Qualitative company analysis, management strategy, risk assessment, long-term investing, portfolio diversification and rebalancing, dividend reinvestment, cyclical growth opportunities, compounding strategies, growth stocks, and dividend stocks.

Social Media Profiles

Favorite Investment Quote

"Risk comes from not knowing what you're doing." — Warren Buffett

Published June 9, 8:15 pm EDT

The Tax-Free Savings Account (TFSA) is highly underused, as many Canadians fail to understand the right use of tax-free withdrawals. It should not mean withdrawing your investments. The stock market rewards long-term investors. If you want consistent withdrawals, consider investing in dividend stocks. They will keep your money invested and pay a certain amount at regular intervals for years. But is investing in dividend stocks an efficient use of your TFSA, an account that can make your $1 million capital gain tax-free? Read till the end, as I will share a strategy that can give you a truly tax-free income, while using TFSA benefits to the fullest.

man in bowtie poses with abacus — Source: Getty Images

TFSA stocks to earn $2,500 per year in passive income

A simple way to earn passive income is to invest in dividend stocks. SmartCentres REIT (TSX: SRU.UN) and Cogeco Communications (TSX: CCA) can give you a well-diversified dividend portfolio.

SmartCentres REIT gives you exposure to the retail real estate market, with the dividend source being monthly rent from Walmart and Walmart-anchored stores. Walmart brings stability, which means you know SmartCentres’ cash flows are safe, but growth is rare as they are high-turnover businesses and do not pay hefty rent. The REIT doesn’t grow distributions much but has a 20-year history of regular monthly payouts.

The need for dividend growth can be fulfilled by Cogeco Communications, which operates on an asset-light model. It leases network access from Mobile Network Operators and offers internet at competitive prices. Its strength is its 30% dividend payout ratio, which leaves ample room for free cash flow fluctuation if there is significant customer churn or a major investment need. It had been growing dividends at 10% before 2024, but slowed the growth rate to 7–8% as regulatory changes increased price competition and reduced its average revenue per user.

Cogeco’s annual dividend for 2026 is $3.95 per share. To earn $1,250 in annual dividends, you will have to buy 317 shares, which will require a $20,710 investment. Similarly, 676 units of SmartCentres REIT can pay you $1,250 in annual dividends. As per the current market price, a $40,395 investment can earn you $2,500 in annual passive income.

Stock	Average Stock Price in May	Dividend per Share	Number of Shares	Total Investment	Total Dividend Amount
CCA	$65.33	$3.95	317	$20,709.61	$1,252.15
SRU.UN	$29.12	$1.85	676	$19,685.12	$1,250.60
Total				$40,394.73	$2,502.75

How to use a TFSA to earn tax-free passive income

The question is, should you use your TFSA contribution room to buy the above dividend stocks? The amount you invest in a TFSA is an after-tax amount. Limiting your contribution to a 6% annual yield is underusing the TFSA’s tax-free investment growth and tax-free withdrawals.

Take the example of a $40,394 TFSA investment needed to earn $2,500 annually in dividend income. If you contribute your working income, you pay $8,281 in tax on this investment amount in 2026 at a 20.5% tax rate. It will take 3.3 years for your $2,500 passive income to recover the tax paid. Only the passive income earned from the fourth year would truly be tax-free.

Tax Slab	Tax Paid on $40,394	Years for Dividend to Repay Tax
20.5%	$8,281	3.3
26%	$10,502	4.2
29%	$11,714	4.7
33%	$13,330	5.3

The TFSA is designed for stocks that can generate high investment income/profit. Suppose you invested $10,000 in Shopify in December 2022, when it was trading near $46. Today, its value is $33,418. That kind of growth is the right use of the TFSA tax benefit.

The $23,000 capital gain is tax-free. You can rebalance your portfolio, transferring some of the amount to dividend stocks. Suppose you decide on a 50% allocation, so you can sell Shopify stock worth $16,500 and use that money to buy the above dividend stocks. Booking profit and converting it into a long-term passive income enhances the tax-free withdrawals and tax-free growth within the TFSA.

Final thoughts

TFSA passive income is a strong tool, especially when you are in a high-income bracket and nearing retirement. It can protect you from Old Age Security (OAS) pension clawback. The TFSA contribution room is limited, but the investment income you can earn within a TFSA is unlimited.