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How to Pay No Tax on Passive Income in Canada!

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What is Passive Income?

Passive income is defined as revenue obtained through owning assets or capital property that provide income without requiring a lot of work on the part of the shareholder.

What is a TFSA?

The TFSA initiative started in 2009. It is a method for people to save money tax-free for their whole lives if they are 18 years of age or older and have a valid social insurance number (SIN).

For tax-filing reasons, TFSA contributions are not deductible. Even when withdrawn, all contributions and income (such as investment income and capital gains) made in the account are typically tax-free.

Tax deductions cannot be claimed for administrative costs associated with TFSAs or any interest paid on loans used to fund TFSA contributions.

Keep dividend-paying investments in a TFSA.

Holding dividend stocks in a tax-free savings account is the best strategy to produce tax-free passive income. A TFSA is a specific type of tax-sheltered account that shields the dividend and capital gains taxes from your investments. Normally, both dividends and capital gains are subject to taxation. By not selling, you can avoid paying capital gains tax; but, dividends provide an automated income stream that is automatically subject to taxation. In a taxable account, dividend taxes cannot be avoided. However, dividend stocks are permissible in a TFSA. You don’t have to pay any taxes on them because of this.

Investment Income from Passive Assets for Your Private Corporation

Many small business entrepreneurs rely heavily on their enterprises to help them save money for their families and their retirement.

Changes to Passive Income Limit the Small Business Deduction

Most small enterprises in Canada are operated by Canadian-controlled private corporations (CCPCs). Until recently, CCPCs and related groups of CCPCs were permitted to use the small business deduction to pay tax on up to $500,000 in active business income at the small company tax rate, subject to a restriction for big corporations.

You must choose the types of assets you’re going to invest in if you enjoy the notion of creating tax-free passive income in a TFSA. Some dividend stocks offer minimal yields, and not all companies pay dividends. You must thus choose your purchases carefully. For TFSAs, the total cumulative contribution room in 2022 is $81,500. So, to withdraw a sizable amount of money from a TFSA, you need a high yield.

BMO Covered Call Utilities ETF would seem to be a suitable option in this situation. It is a utilities ETF that increases payments by using covered calls. It has an amazing yield of 7.4% as a result. You receive $6,031 in dividend income with an investment of $81,500 at a 7.4% rate of return. For an investment of less than $100,000, that is a sizable small cash incentive. Nevertheless, two aspects should be kept in mind:

  • They charge a hefty administration fee. When compared to a broad market index fund, its MER (0.71%) is significantly higher.
  • Covered calls reduce potential gains. While they do generate substantial cash income, they also put a limitation on capital gains.

These two drawbacks are significant enough to warrant only holding a modest investment in ZWU rather than the entire portfolio. However, you could simply create a diversified portfolio using ZWU and a few other high-yield companies or funds to generate a comparable yield with more upside potential.


There are ways to avoid paying taxes on passive income. This blog has discussed tax-avoidance strategies for small businesses, private corporations, and individuals with passive income. Remember to seek professional assistance if you run into problems.

Salman Rundhawa
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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