The CRA, or Canada Revenue Agency, is the tax authority in Canada and is the one-stop shop for anything related to taxes. While taxes are an integral part of every economy, individuals and households should look to limit their tax liability as much as possible.
Here, we will focus on how Canadians can create enormous passive income that is sheltered from CRA taxes. Let’s go.
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Find the right account, like the TFSA
The TFSA, or Tax-Free Savings Account, was introduced back in 2009. It is a popular registered account in Canada due to the flexibility associated with it as well as its tax-sheltered status. The TFSA contribution limit increases each year, while any unused contribution room can also be carried forward to subsequent years.
In 2023, the TFSA contribution limit increased by $6,500, bringing the total contribution room to $88,000. Any Canadian resident over the age of 18 is eligible to contribute to this account. Moreover, you can hold a variety of qualified investments in a TFSA, including bonds, stocks, mutual funds, and exchange-traded funds in a TFSA.
Automate your TFSA contributions
Dollar-cost averaging is the best strategy to gain exposure to the equity market. Here, you allocate a certain portion of your savings each month and invest in individual stocks or exchange-traded funds.
Given the contribution limit of $6,500 in 2023, Canadians should look to invest $500 each month and buy shares of quality companies to benefit from outsized returns over time. Further, a monthly investment of $500 will balloon to $103,276 in 10 years and to $382,848 in 20 years, given annual returns of 10%.
Where to invest in 2023?
A majority of your equity savings should be allocated toward exchange-traded funds, which lowers overall risk. In order to make enormous passive income in a TFSA, you need to invest in quality dividend stocks and reinvest the dividend income to buy additional shares over time, thereby compounding your total returns.
Moreover, for those who have a higher risk appetite, investing in blue-chip growth stocks such as Brookfield Renewable Partners (TSX:BEP.UN) is a great option. BEP stock has already delivered outsized returns to shareholders. After adjusting for dividends, BEP has gained over 1,550% in the last two decades. So, an investment of $6,500 in BEP stock in November 2003 would be worth $107,260 today.
Due to an uncertain macro environment, shares of Brookfield Renewable Partners are down 45% from all-time highs. But the pullback has increased its dividend yield to 5.4%, which is quite tasty.
Brookfield Renewable Partners is among the largest clean energy companies globally. It has a widening portfolio of cash-generating assets, allowing it to increase dividend payouts consistently each year.
Despite its massive size, BEP expects to grow earnings between 5% and 9% each year in the medium term, fueling its dividend growth.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| Brookfield Renewable | $34.30 | 190 | $1.86 | $353 | Quarterly |
If you invest $6,500 in BEP stock today, you will earn $350 in annual dividend income. Moreover, BEP stock trades at a discount of 23.5% to consensus price target estimates as Wall Street remains bullish on its long-term prospects.
If BEP stock trades near consensus estimates, investors may earn $1,527 via capital gains. So, total returns in the next 12 months may be close to $1,880, all of which is exempt from CRA taxes.
