How to Use a TFSA to Bring in $1,000 a Month Completely Tax-Free

This TSX fund pays a fixed $0.10 per share monthly distribution, which makes passive income planning easy.

Key Points
  • EIT.UN uses a managed distribution policy that currently provides a monthly payout of $0.10 per unit.
  • Generating approximately $1,000 per month currently requires about 10,000 units or roughly $173,300 invested.
  • The fund uses active management and leverage, making it higher risk and higher cost than a traditional index ETF.

One challenge income investors quickly discover is that most exchange-traded funds (ETFs) do not pay perfectly predictable distributions. That is why some investors are drawn to funds that use a managed distribution policy.

These policies are more commonly found in older closed-end funds (CEFs) rather than traditional ETFs. Instead of allowing distributions to fluctuate significantly, management attempts to maintain a relatively stable payout schedule over time, often drawing from a combination of dividends, interest income, capital gains, and return of capital.

One of the most popular examples in Canada is the Canoe EIT Income Fund (TSX: EIT.UN). The fund has maintained a monthly distribution of $0.10 per unit for many years, making it particularly attractive to investors seeking reliable cash flow.

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The math behind $1,000 per month

Let’s start with the numbers. As of June 12, EIT.UN traded at approximately $17.33 per unit and continued to pay its regular monthly distribution of $0.10 per unit. To generate $1,000 per month, you would need:

1,000÷0.10=10,0001{,}000 \div 0.10 = 10{,}000

That works out to 10,000 units of EIT.UN. At a unit price of $17.33, the required investment would be:

10,000×17.33=173,30010{,}000 \times 17.33 = 173{,}300

In other words, an investor would need approximately $173,300 invested in EIT.UN to generate roughly $1,000 per month based on the current distribution rate.

One reason many investors prefer holding a fund like EIT.UN inside a Tax-Free Savings Account (TFSA) is the tax treatment. Outside a registered account, distributions can consist of multiple components including dividends, capital gains, ordinary income, and return of capital, each of which may receive different tax treatment.

Inside a TFSA, however, those distributions can be withdrawn completely tax-free, making the account a natural fit for income-oriented investments like EIT.UN with complex tax treatment.

Read the fine print first

Before rushing out to buy EIT.UN for the yield, it is important to understand what you are actually investing in. EIT.UN is not an ETF. It is an actively managed CEF that invests in a diversified portfolio of Canadian and U.S. stocks.

The portfolio tends to focus on large-cap companies across sectors such as financials, energy, industrials, and other dividend-paying businesses. Management has considerable flexibility in selecting holdings and adjusting allocations over time.

The fund also uses leverage. Specifically, EIT.UN can borrow up to 1.2 times its net asset value, or roughly 120% leverage. That can enhance returns and support distributions during favourable market conditions, but it also increases risk when markets decline.

Investors should also be aware of the cost structure. EIT.UN charges a 1.1% management fee, which is substantially higher than what investors would pay for a passive index ETF.

Another detail to watch is the fund’s discount or premium to net asset value (NAV). As of June 12, EIT.UN traded at $17.33 while its NAV was $17.67. That means investors were buying the fund at a slight discount to the underlying value of its holdings.

Still, for investors seeking high monthly income and willing to accept the additional complexity, EIT.UN remains one of Canada’s most widely followed income-oriented closed-end funds.

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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