A $500 monthly paycheque that never lands on a tax return sounds suspiciously like financial sorcery. Fortunately, Canadians don’t need the Sorcerer’s Stone, a second job, or a tenant texting about the furnace at midnight to create one.
The target we’re seeking is $6,000 annually. How much invested capital it requires depends on the income yield. A 4% portfolio needs $150,000, while a 6.28% yield lowers the requirement to roughly $95,500. That puts the goal within the contribution room some longtime Tax-Free Savings Account (TFSA) holders have accumulated.
Source: Getty Images
First, why a TFSA?
The Canada Revenue Agency (CRA) generally doesn’t tax interest, dividends, capital gains, or withdrawals inside a TFSA. Contributions aren’t tax deductible, but the income doesn’t appear on a tax return or reduce federal income-tested benefits such as Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). That makes using a TFSA particularly valuable for retirement income.
The 2026 annual limit is $7,000. Someone who was at least 18 in 2009, remained eligible every year, and has never contributed could have as much as $109,000 of room. Younger Canadians, new residents, and existing contributors will have different limits, so the CRA account and personal records deserve a check before any ambitious button-clicking begins.
Unused room carries forward indefinitely. Withdrawals are also added back as new room the following calendar year, not immediately. Replacing a withdrawal too soon without other available room can trigger a 1% monthly over-contribution tax, which would be a rather irritating ending to an article about tax-free income.
A monthly-income ETF
Once the account rules are handled, BMO Canadian High Dividend Covered Call ETF (TSX:ZWC) could do the income-generating work. It holds a diversified portfolio of Canadian dividend-paying companies selected partly for yield, dividend growth, and payout strength.
The fund then writes covered-call options on part of its portfolio. Those options generate premiums that supplement the underlying dividends, helping ZWC provide a higher monthly distribution. The trade-off is that selling calls can limit some gains when its holdings charge enthusiastically upward. Investors unfamiliar with the strategy should understand how covered-call exchange-traded funds (ETFs) create income before buying.
ZWC recently traded near $22.93 and paid $0.12 per unit monthly in both May and June. That produces an annualized distribution of $1.44 and a yield near 6.28%. The monthly payment had previously been $0.105, making the recent increase especially helpful for this income target. Here is what the investment could produce if the current distribution continues.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | ANNUAL DIVIDEND | ANNUAL TOTAL PAYOUT | FREQUENCY | TOTAL INVESTMENT |
|---|---|---|---|---|---|---|
| ZWC | $22.93 | 4,167 | $1.44 | $6,000.48 | Monthly | $95,549.31 |
The position would generate approximately $500.04 each month at the current payout rate. Someone with the full $109,000 of available room could reach the target without filling the entire account, leaving money available for a lower-yielding growth investment or plain old diversification.
Foolish takeaway
ZWC stock’s distribution isn’t guaranteed. Dividends can be cut, option premiums fluctuate, and the unit price can decline. Its 0.72% management expense ratio is also higher than those of many passive index ETFs, while its Canadian portfolio remains concentrated in financials, energy, utilities, and communications.
I would therefore treat $500 as a current target rather than a permanent promise and keep monitoring the distribution. Still, ZWC stock offers diversification, monthly cash flow, and enough yield to turn accumulated TFSA room into a surprisingly useful tax-free paycheque.
