Canadian retirees are searching for ways to earn good income from their savings to complement the Canada Pension Plan (CPP), Old Age Security (OAS), and company pensions. One popular investing strategy to meet this goal involves owning a combination of guaranteed investment certificates (GICs) and dividend stocks inside a Tax-Free Savings Account (TFSA).
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TFSA limit
The TFSA contribution limit in 2026 is $7,000. This brings the cumulative maximum TFSA contribution space per person to $109,000. A retired couple would have as much as $218,000 in TFSA room to generate a stream of tax-free passive income.
In most cases, it makes sense for people to use up their full TFSA contribution space before owning investments in taxable accounts. All interest, dividends, and capital gains earned inside a TFSA are protected from the CRA, and the full amount of investment earnings can be removed as tax-free income.
Another benefit for pensioners is that the CRA does not count TFSA income toward the net world income calculation used to determine the Old Age Security (OAS) pension recovery tax, also widely known as the OAS clawback. This is important for people who receive generous company pensions and full government retirement benefits. The net world income clawback threshold for the 2026 income year is $95,323.
Best TFSA investments for income
Risk tolerance, required returns, and liquidity needs all come into play when deciding on the types of investments to hold inside a TFSA focused on generating income.
GICs are 100% safe as long as they are issued by a Canada Deposit Insurance Corporation (CDIC) member and the amount is within the $100,000 limit. The best rates are paid on non-cashable GICs, so investors need to be comfortable locking up the funds for a few years to get higher returns. Rates are fixed for the term of the certificate, and rates available in the market when the GIC matures could be lower. At the time of writing, investors can get GIC rates of 3% to 4% depending on the issuer and the term.
Dividend stocks often provide yields that are higher than GIC rates. In addition, each dividend increase raises the return on the initial investment. Stocks can be sold at any time to access the invested funds, providing investors with good liquidity. On the downside, share prices can fall below the purchase price, and dividends can be cut if a company faces financial challenges.
In the current market conditions, where share prices are near record levels in many sectors, it makes sense to consider stocks with long track records of dividend growth.
Enbridge (TSX: ENB), for example, has increased its dividend in each of the past 31 years.
The energy infrastructure giant has a $40 billion secured capital program on the go that is expected to drive revenue and earnings higher in the next few years. This should deliver adequate cash flow growth to support steady dividend increases. Investors who buy ENB stock at the current level can get a dividend yield of close to 5%.
The bottom line
Pensioners can quite easily put together a diversified portfolio of GICs and dividend stocks to get an average yield of 4% today. This would generate $8,720 per year in tax-free passive income for a retired couple with combined TFSA holdings of $218,000.
