A surprising number of Canadians never look beyond the word “savings” and end up parking cash in an account that’s actually designed to be one of the most powerful investment tools available. In short, the TFSA allows your investments to grow tax-free and allows you to withdraw money at any time without incurring taxes or affecting government benefits.
For younger investors, the TFSA is an ideal vehicle for long-term growth. And for those who are further along in life and starting to prioritize income, it can also be an excellent way to generate tax-free passive cash flow.
There are many ways to do this, but one of my favorite options is Kano EIT Income Fund (TSX:EIT.UN). This fund simplifies income planning thanks to its fixed monthly distribution of $0.10 per share.
Below I’ll break down how this fund works, why it’s a good fit for a TFSA, and exactly how many shares you need to earn $420 a month in tax-free income.
What is the Canoe EIT Income Fund?
EIT.UN holds a concentrated portfolio of approximately 40 Canadian and US stocks, almost 50/50 split. It is actively managed and can use up to 1.2x leverage, meaning it can borrow modestly to improve returns.
Its defining feature is its managed distribution policy, which aims to provide a stable monthly payout of $0.10 regardless of short-term market fluctuations. That distribution is financed by a mix of dividends, capital gains and capital return.
Because the tax nature of these distributions can be complex in a non-registered account, the TFSA is the cleanest place to manage this fund. Within a TFSA, everything you receive is tax-free and withdrawals do not need to be tracked or reported.
How monthly income works
The income calculation for this fund is refreshingly simple. Each share pays $0.10 per month, or $1.20 per year in total benefits.
The fund typically goes ex-dividend around the third week of each month, with payment occurring around the middle of the following month. As long as you own the shares before the ex-dividend date, you will receive the next payment.
Because the payout is fixed, you don’t have to guess what the return will be next quarter or worry about variable payments. You simply decide how much monthly income you want and work backwards.
How many shares do you need for $420 a month
To earn $420 per month, divide your target income by the monthly payout per share.
$420 ÷ $0.10 = 4,200 shares
Owning 4,200 shares of the Canoe EIT Income Fund would earn $420 per month, or $5,040 per year. If that income were held within a TFSA, it would be completely tax-free.
How much should you invest
Once you know the number of shares, the final step is to calculate the capital required. At the time of writing on December 18, the fund is trading at $15.77 per share.
4,200 shares × $15.77 = $66,234
That means you would need to invest approximately $66,234 in your TFSA to generate $420 per month in tax-free income. The exact amount will fluctuate with the market price, but the calculation of stock-based income remains the same.
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