How a TFSA Can Generate $7,240 in Annual Tax-Free Passive Income

Here’s my take, plain and simple: Alaris Equity Partners Income Trust (TSX:AD.UN) is one of the best passive-income stocks in Canada right now, and your TFSA (Tax-Free Savings Account) is the ideal place to own it.

The trust currently offers a forward dividend yield of 6.6%. If you invest $109,000 of your TFSA room in Alaris, you would generate approximately $7,240 in annual tax-free dividend income.

But let’s walk through why Alaris earns that kind of confidence and why the smarter play is to hold more than one stock.

Why Alaris Equity Partners belongs in the TFSA

Alaris provides preferred equity capital to lower-middle-market private businesses across North America. These are profitable, cash-generating companies in sectors like business services, healthcare, industrial services, and construction.

In exchange for that capital, Alaris receives monthly or quarterly cash distributions on its preferred equity, along with a common equity position that provides upside if the business grows.

The distributions Alaris receives are set 12 months in advance and adjusted annually based on a top-line performance metric, such as net sales or gross profit. That structure creates predictable, recurring income streams, exactly what a passive income investor wants to see.

As of the most recent quarter, the portfolio spans 24 partner companies. Earnings coverage across those partners is around 1.5 times, which management views as healthy.

The trust recently increased its annual distribution to $1.52 per unit, reflecting growing confidence in its cash flows. In Q1 of 2026, Alaris grew its revenue and operating income by 2.7% year over year.

Its partner distribution revenue rose 11%, driven by preferred distributions that grew approximately 10%. Distributable cash flow improved 6% compared to the same period last year.

The payout ratio came in at 51.9% for the quarter, below the management target of 65%-70%. It indicates the TSX dividend stock can grow the annual dividend while maintaining a sustainable payout ratio.

CEO Steve King noted on the Q1 earnings call that GWM, a partner that had been deferring distributions, restarted payments this month and is tracking well above budget.

King also flagged a strong deal pipeline for the rest of 2026, including a new $75 million investment in a company called Kubik, completed after quarter-end.

The competitive environment for small to medium-sized businesses is attracting 50 or more bidders per process right now, which he says makes potential exits more valuable and new deals more selective.

Use the TFSA for passive income

The 2026 cumulative TFSA contribution room is $109,000. If you put that entire amount into Alaris at the current yield of 6.6%, you would collect approximately $7,240 in annual tax-free income.

COMPANYRECENT PRICENUMBER OF SHARESDIVIDENDTOTAL PAYOUTFREQUENCYAlaris Equity Partners$22.87$4,766$0.38$1,811Quarterly

But concentrating your entire TFSA in a single stock is a risk most investors should avoid. No company is immune to unexpected events, and Alaris has had partners reduce or pause distributions in past years. Heritage and FMP are current examples of partners that are working through challenges.

The better approach is to build a diversified portfolio of quality dividend stocks across sectors. Think of Alaris as a core holding, not the whole portfolio. Pair it with a Canadian bank, a utility, a REIT, or another stable dividend payer.

Alaris has invested over $1.8 billion in more than 35 companies since its founding. Its structure has remained largely unreplicated after more than two decades in business.

For investors who want dependable, growing passive income sheltered inside a TFSA, this trust deserves a close look.

The post How a TFSA Can Generate $7,240 in Annual Tax-Free Passive Income appeared first on The Motley Fool Canada.

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Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends Alaris Equity Partners Income Trust. The Motley Fool has a disclosure policy.