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.
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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.
