Rising inflation has Canadian seniors wondering how they can generate more retirement cash flow to complement their existing pension plans.
One popular strategy involves holding dividend stocks inside a self-directed Tax-Free Savings Account (TFSA) to generate tax-free passive income.
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TFSA benefits
Canada launched the TFSA in 2009 to give people another vehicle to save money to meet financial goals. The flexibility of the TFSA makes it attractive to build a fund for vacations, property purchases, or retirement income.
All interest, dividends, and capital gains earned inside a TFSA are not taxed and can be fully removed as tax-free income or reinvested to grow the fund. Any withdrawals from the TFSA automatically open up equivalent new contribution room in the following calendar year, in addition to the regular increase to the TFSA limit.
Retirees who collect Old Age Security (OAS) and report high total annual earnings from OAS, the Canada Pension Plan, and work pensions have to keep an eye on their net world income to avoid triggering the OAS pension recovery tax. Each dollar of net world income above a minimum threshold is hit with a $0.15 OAS clawback that reduces the person’s OAS in the next annual payment period. The number to watch in the 2026 income year, is $95,323.
For example, a senior with 2026 net world income of $105,323 would see their July 2027 to June 2028 OAS total payment drop by $1,500.
Taking advantage of the full TFSA contribution space can ease the pain. Income from a TFSA investment doesn’t count toward the net world income calculation. As such, it generally makes sense for seniors to maximize their TFSA contributions before holding income-generating investments in taxable accounts.
Good TFSA stocks for passive income
Stocks with high yields often attract the most attention, but dividend growth is also very important, especially for investors who plan to own the shares for a long time. Each dividend increase raises the yield on the initial investment. Over the long haul, buying a stock with a lower initial dividend yield can potentially deliver better overall returns.
Fortis
Fortis (TSX:FTS) is a good example of a dividend-growth stock to consider for a TFSA income fund. The company has increased the distribution in each of the past 52 years and intends to raise the payout by 4% to 6% annually through at least 2030.
Fortis gets most of its income from rate-regulated utility businesses providing essential products and services. Cash flow tends to be predictable and reliable, so management can comfortably plan growth investments to drive earnings higher.
Fortis is working on a $28.8 billion capital program that will raise the rate base from about $42 billion to roughly $58 billion over five years. The boost to cash flow as the new assets go into service should support the planned dividend increases.
Fortis trades near $76 per share at the time of writing, compared to the 2026 high above $83. Investors can take advantage of the dip to pick up a yield close to 3.4%.
The bottom line
Retirees can take advantage of their TFSA to generate investment income that won’t put OAS at risk of a clawback. Fortis is one of many stocks in the TSX that have long track records of delivering steady dividend growth for income investors.
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