Here’s How I’d Turn a TFSA Into $357 a Month, Tax-Free

Did you know that you can legally generate tax-free investment income in Canada?

It’s all thanks to the tax-free savings account (TFSA), which lets you hold stocks and bonds tax-free.

If you have a $109,000 TFSA – easily doable based on the room accumulated from 2009 to today – then you can get a modest sum like $357 per month tax-free. Here’s how.

Real estate investment trusts (REITs)

Canadian REITs are among the best assets you can own if your goal is to generate consistent monthly passive income. These securities are effectively companies/stocks that invest in diversified real estate portfolios. Canadian REITs own many different forms of real estate: residential, commercial, office space, and hotels. There are even REITs that invest in infrastructure projects, such as pipelines and telecommunication towers.

How REITs generate monthly passive income

REITs generate monthly passive income because they have monthly payout schedules. The basic reason is that tenants typically pay their bills once per month. Think about your own monthly rent or mortgage bill. Most likely, you pay it every month. The companies that pay REITs’ income usually pay on the same schedule. This results in REIT income coming in on a consistent monthly schedule, much as you pay your rent or utilities on a monthly schedule.

Another reason why REITs pay monthly is because they attract an investor base that wants regular income. REIT investors skew older and more income-oriented than average, so it makes sense for REITs to provide regular dividend payout schedules that meet their investors’ needs. Combine that with the fact that REITs have an unusually regular revenue collection schedule, and the decision to pay monthly becomes a no-brainer.

Why Canadian REITs?

Having explained why REITs, in general, are good for generating monthly income, the next logical step for me is to answer the question, “Why Canadian REITs?” The Canadian REIT universe is relatively small, and U.S. REITs also offer the monthly pay feature. So, why buy Canadian REITs?

The main reason I’m plugging TSX REITs here is because they are tax-advantaged compared to U.S. REITs. The U.S. charges a 15% withholding tax on dividends paid to Canadian investors, and that tax comes out whether you hold your REITs in a TFSA or a taxable account. The RRSP does spare you the tax; but conversely, RRSP withdrawals are taxable by the CRA. So, only Canadian REITs let you collect monthly passive income truly tax-free.

A Canadian REIT worth considering

Now that I’ve explored the case for investing in Canadian REITs in general, it’s time to explore some specific REITs worth investing in.

One that might be worth a look is Killam Apartment REIT (TSX: KMP.UN). It’s a residential REIT that owns apartment buildings across the country. As a residential REIT, its properties have low obsolescence risk (a problem for hotel REITs and certain hyper-specialized REITs). It does face a risk in the form of a thawing nationwide rental market. However, Killam specifically has a large portfolio in Atlantic Canada, whose biggest cities (Halifax and St. John’s) are still seeing rising rents. Killam has a healthy balance sheet, with a 0.78 debt-to-equity ratio. It has grown its funds from operations (FFO), revenue and AFFO at a “slow but steady” pace in recent years. Finally, it trades at 17.5 times AFFO, which is lower than the TSX’s P/E ratio. Overall, Killam REIT is worth a look.

How you could get $357 per month tax-free

Now, back to the topic we started with:

Getting $353 per month in tax-free income in your TFSA.

If you hold a $109,000 TFSA portfolio that yields 3.9%, you get about $4,283.70 in annual passive income. That works out to $357 per month, as the table below shows.

So, getting $357 per month in portfolio income with REITs is very doable – even if you’re starting with a relatively modest amount of savings.