No taxes are due on any returns from investments in a TFSA. Provided you follow the rules and only use eligible investments without exceeding your annual contribution limit, your TFSA can become a powerful tool for long-term capital growth. You can use it in a variety of ways, from creating a self-directed retirement for your golden years to a passive income stream.
Everything you earn in a TFSA is yours, without the worry of capital gains or dividend taxes. Today I’ll discuss how you can use the TFSA to hypothetically generate $500 per month in tax-free income without lifting a finger by using an Exchange-Traded Fund (ETF).
Kano EIT Income Fund
Kano EIT Income Fund (TSX:EIT.UN) is a closed-end income-oriented fund trading on the TSX that offers investors cash returns as one of its primary objectives. The $2.69 billion market cap fund functions like a stock. It pays investors monthly distributions based on the number of units (or shares) they own. EIT.UN does this by holding a diversified portfolio of dividend-paying stocks, spread across dividend-paying companies in Canada and the US. The advantage of the fund is the income it can provide.
Unlike typical ETFs, the Canoe EIT Income Fund is a higher-risk investment to consider. The fund uses leverage to potentially provide higher returns than its shareholders’ investments. The fund’s management is allowed to borrow up to 20% of the portfolio’s value, meaning it can operate with as much as 1.2 times the actual capital invested in the fund.
Leverage can be an excellent way to maximize the impact of positive returns. It will technically provide a higher return than what the underlying investments would normally provide. However, leverage can also magnify losses during market downturns. Higher yielding returns always come with the caveat of potentially greater than usual losses.
However, in an ETF, diversification tends to offset the losses of one asset in the portfolio through better performance of others.
Tax-free monthly income
At the time of writing, EIT.UN is trading at $16.96 per unit and paying investors $0.10 per unit per month, which translates into an annualized dividend yield of 7.3%. Let’s say you want to generate $500 in tax-free passive income every month. In that case, the table below shows how much you may need to invest in the fund to generate this amount each month.
| Ticker | Recent price | Monthly dividend per unit | Number of units | Total monthly dividend | Investment required |
| EIT.UN | $16.96 | $0.10 | 5000 | $500 | $84,800 |
Silly takeaway
The example above is only intended to show how a high-yield income-producing asset can produce up to $500 per month in dividend income. I would strongly advise against allocating too much capital to one or two assets. An ETF gives you exposure to a group of stocks in one ticket, diversifying your income. However, I would advise creating a well-balanced portfolio with lower-risk investments to even the odds.
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