Use a TFSA to Earn $500 a Month With No Tax

A lot of Canadians focus on growing their Tax-Free Savings Account (TFSA) balance as large as possible. But there’s another way to think about it. Instead of asking, “How big can I make this account?”, you can ask, “How much monthly cash flow can this generate for me?”

Because inside a TFSA, every dollar you earn is yours to keep. No dividend tax. No capital gains tax. No reporting. Withdrawals are also tax-free, and the contribution room comes back the following January.

If your goal is predictable, monthly income, say, around $500, one long-standing Canadian option worth understanding is Canoe EIT Income Fund (TSX:EIT.UN).

What Is EIT.UN?

EIT.UN is a closed-end income fund designed with cash flow as its primary objective. It holds a diversified portfolio of dividend-paying stocks, roughly split between Canadian and U.S. companies. Growth matters, but income comes first.

Unlike a plain-vanilla exchange-traded fund (ETF), EIT.UN can also use leverage. Management is allowed to borrow up to 20% of the portfolio’s value, meaning the fund can operate at as much as 1.2 times invested capital. That leverage increases the income generated by the underlying holdings, but it also increases volatility during market declines. Higher yield always involves trade-offs.

As of writing, EIT.UN trades at $16.87 per unit and pays a $0.10 monthly distribution. That works out to $1.20 per year per unit. The management fee is 1.1%, not including leverage costs. Ex-dividend dates typically fall around the 22nd of each month, with payments made around the 15th of the following month.

Let’s look at the income math

Each unit pays $0.10 per month. To generate $500 monthly, you would need 5,000 units. At a market price of $16.87, that requires an investment of approximately $84,350.Held inside a TFSA, the full $500 per month is tax-free. You can reinvest it to compound faster, or withdraw it without triggering any tax bill.

At current prices, the distribution yield is just over 7%. That’s meaningfully higher than most traditional dividend ETFs or high-interest savings products. The yield is supported in part by leverage and return of capital, which is why this fund should be viewed as an income tool rather than a pure growth vehicle.

Over the past 10 years, with distributions reinvested, EIT.UN has delivered a 12.59% annualized total return. That’s solid. Still, if your main objective is long-term capital growth and minimizing fees, there are lower-cost ETFs that may be more suitable. This one is built for investors who prioritize steady monthly cash flow first.

The post Use a TFSA to Earn $500 a Month With No Tax appeared first on The Motley Fool Canada.

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More reading

• A 7% Yield? Here’s the Question TFSA Investors Must Ask
• The Ideal TFSA Stock: A 7.5% Yield Paying Constant Cash
• Use Your TFSA: Earn $420 Each Month in Tax-Free Income

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.