What’s Passive Income?

Passive Income is the revenue earned from assets or capital property that generates income with minimal effort required by the shareholder.


Can you provide an explanation of what a TFSA is?

A Tax-Free Savings Account (TFSA) is an initiative introduced in 2009 that enables individuals with a valid social insurance number (SIN) and aged 18 years or older to save money tax-free for their entire lifetime. While TFSA contributions are not tax-deductible, all contributions and earnings made in the account, including investment income and capital gains, are usually tax-free upon withdrawal. However, administrative costs associated with TFSAs, and interest paid on loans used to fund TFSA contributions cannot be claimed as tax deductions.


Maximizing Tax-Free Passive Income with Dividend Investments in a TFSA

To generate tax-free passive income, the most effective approach is to hold dividend-paying investments in a Tax-Free Savings Account (TFSA). This type of account provides a tax-sheltered environment that shields your investments from dividend and capital gains taxes. Generally, both dividends and capital gains are subject to taxation. While you can avoid paying capital gains tax by not selling, dividends provide a recurring income stream that is automatically taxed. In a taxable account, it is impossible to avoid dividend taxes. However, you can invest in dividend stocks in a TFSA, where they are allowed and tax-free.

Passive Income

Passive Asset Investment Income for Your Private Corporation

Passive Asset Investment Income for Your Private Corporation: A Key Savings Strategy for Small Business Owners Planning for Retirement and Family Financial Security.


Changes to Passive Income Limit Small Business Deduction for Canadian-controlled Private Corporations

For years, Canadian-controlled private corporations (CCPCs) and related groups of CCPCs were able to utilize the small business deduction to pay tax on up to $500,000 in active business income at the small company tax rate, subject to certain restrictions for larger corporations. However, recent changes to the regulations have limited this deduction for businesses that earn passive investment income.

To create tax-free passive income in a TFSA, you need to choose the appropriate assets to invest in. While some dividend stocks provide minimal yields, not all companies pay dividends, so it’s essential to be selective in your purchases. In 2022, the cumulative contribution room for TFSAs is $81,500, which is substantial but still limited. To withdraw a significant amount of money from a TFSA, you need a high yield.

One option is the BMO Covered Call Utilities ETF, which is a utilities ETF that uses covered calls to increase payments and has an impressive yield of 7.4%. With an investment of $81,500 at a 7.4% rate of return, you would receive $6,031 in dividend income, which is a considerable cash incentive for an investment of less than $100,000. However, there are two significant considerations:

First, the administration fee is high, with an MER of 0.71% compared to a broad market index fund. Second, covered calls limit potential gains despite generating substantial cash income. These drawbacks suggest that holding only a modest investment in ZWU (BMO Covered Call Utilities ETF) rather than the entire portfolio is prudent. Nevertheless, you can create a diversified portfolio using ZWU and a few other high-yield companies or funds to generate a comparable yield with more upside potential.


Passive Income


In conclusion, various tax avoidance strategies for passive income have been discussed in this blog, including options for small businesses, private corporations, and individuals. It’s important to note that seeking professional assistance may be necessary if you encounter any issues or have further questions.