Passive Income

Passive income is money that comes in without you actively working for it. In the context of investing, it usually means income generated by your portfolio: dividends from stocks, distributions from ETFs, interest from bonds or GICs, or rental income from property (including REITs).

Common sources for Canadian investors

• Dividends: Canadian companies that pay regular dividends, or dividend-focused ETFs. Eligible dividends from Canadian companies receive favourable tax treatment through the dividend tax credit.
• Interest: GICs, HISAs, and bond funds pay interest income. This is taxed at your full marginal tax rate, making it less tax-efficient than dividends or capital gains.
• Distributions: ETFs and mutual funds distribute income from the underlying holdings. These can include a mix of dividends, interest, and capital gains.

The tax picture

Not all passive income is taxed equally in Canada. Capital gains are taxed at a lower effective rate than interest. Canadian dividends receive the dividend tax credit. Interest income is taxed at your full rate. Where you hold each type of investment (which account) matters. This is the idea behind asset location.

Why it matters

Passive income is what eventually lets your investments support your lifestyle, whether that’s supplementing your paycheque now or funding your retirement later. Understanding the different types helps you make better decisions about what to hold and where to hold it.

A concrete example

Say you have $200,000 invested in a mix of dividend ETFs yielding 3.5% and a GIC ladder earning 4%. If $150,000 is in the dividend ETFs, that generates about $5,250 per year in dividends. The $50,000 in GICs adds $2,000 in interest. That’s $7,250 in passive income annually, or roughly $604 per month, without selling a single investment.