TFSA limit
The TFSA contribution limit will be $7,000 in 2026. This brings the cumulative maximum contribution limit per person to $109,000 for everyone who has qualified since the TFSA was founded in 2009.
All interest, taxes and capital gains earned within the TFSA are tax-free and the full amount of income from the investments can be written off as tax-free income. That’s good news for anyone who has a TFSA portfolio, but it’s especially useful for retirees who receive an old-age guarantee (OAS).
The CRA imposes a 15% OAS pension tax on net worldwide income earned above a minimum threshold. Company pensions, OAS, CPP and income from investments in taxable accounts are all included in the calculation. However, TFSA income does not count toward the OAS clawback determination.
Any funds withdrawn from a TFSA will open an equivalent new contribution room in the following calendar year, along with the regular TFSA limit increase. This provides flexibility for people who may need to withdraw a large amount for a short-term expense but want to replace the TFSA funds at a later date.
GICs or dividend stocks
Guaranteed investment certificates (GICs) and dividend stocks are popular investment choices for generating passive income.
GICs provide interest income while protecting invested capital, as long as the GIC is issued by a member of the Canadian Deposit Insurance Corporation (CDIC) and is under the $100,000 limit.
GIC rates are lower than they were two years ago, but investors can still get non-redeemable GIC rates of 3% to 3.5%, depending on the issuer and term. That’s well above the current inflation rate, so it makes sense to have some GICs in the income portfolio.
The downside is that the interest earned is fixed for the life of the GIC and the interest may be lower when the GIC matures and the money needs to be reinvested. Plus, you need to tie up the money to get the best rates. This means that the invested capital is not available for emergencies.
Dividend stocks often pay dividends that provide higher yields than GICs. Furthermore, dividend increases will increase the return on the initial investment. Shares also offer greater flexibility as they can be sold at any time to access the savings.
However, share prices can fall below the purchase price and dividends are not 100% safe. Companies may have to reduce their payouts if they experience cash flow problems. That said, the TSX is home to many top dividend growth stocks that pay solid dividends that should be safe.
Enbridge
Enbridge (TSX:ENB), for example, has been increasing its dividend annually for more than 30 years.
The company is a leader in its sector and has the financial strength to grow through acquisitions and development projects. The current $35 billion capital program should deliver steady growth in distributable cash flow over the coming years to enable continued dividend increases. At the time of writing, ENB stock offers a dividend yield of 5.9%.
The bottom line
Investors can quite easily build a diversified portfolio of GICs and dividend growth stocks to generate an average return of at least 4% today. On a $109,000 TFSA, this would provide an annual tax-free income of $4,360, or about $363.33 per month.
#TFSA #generate #average #month #taxfree #passive #income