Passive income can be a great way to earn big bucks for doing almost no work. But the term is often misunderstood. Anyone looking to open this type of income stream should know up front that it doesn’t literally mean doing no work.
In this article, Wealth Professional explores the top smart passive income ideas especially if you have clients who want to boost their portfolio. We talked to industry experts who shared insights into the role passive income plays in wealth creation. We’ve also added the latest news on passive income at the bottom of this page for quick reading and sharing.
Passive income, sometimes called unearned income, is income that requires little work to make and maintain and usually comes from sources outside of a traditional employer. As the name implies, earning passive income doesn’t always require your clients’ active participation.
Unlike active income, passive income is generated automatically and creates residual income with considerably less effort and time. Not only does it have the potential to make investors more money, but it also frees up their time.
“Passive income plays a vital role in both the creation and preservation of wealth,” says Mustafa Bukhari, national team lead at Guelph-based Skyline Wealth Management Inc. “It provides a steady, recurring stream of income that can be reinvested to harness the power of compounded growth.”
“Beyond growing wealth, passive income offers financial flexibility by helping to cover everyday expenses, providing a buffer during periods of economic uncertainty when volatility persists, or support more complex strategies such as leveraging borrowed capital for investment purposes.”
Bukhari adds that investors can benefit from deferred taxation of certain passive income sources to boost overall portfolio returns. These sources include dividends, capital gains, and return of capital. Bukhari is awarded as one of the Best Financial Advisors and Professionals Under 40 in Canada in 2024.
Susyn Wagner, senior wealth advisor and senior portfolio manager at Wellington-Altus Private Wealth Inc., highlights the importance of passive income in retirement planning.
“It’s important to have multiple sources of income because they add a layer of security, protecting [your clients’] plan from market shifts and unexpected expenses,” she explains. “While some Canadians rely on government pensions, employer pensions, or annuities, these sources aren’t always available to everyone.”
“By using self-directed registered accounts like RRSPs, TFSAs, or non-registered portfolios, [your clients] can create [their] own passive income streams. Adding dividend-paying stocks, REITs, or interest-bearing vehicles to these accounts, combined with a solid cash reserve, gives [your clients] a diversified income strategy that supports long-term stability.”
Get to know more about Wagner and other prominent women in the industry in our special report on the Top Female Financial Advisors and Professionals in Canada.
Below, we list some of the top investment-based passive income examples that can bolster or complement your clients’ existing portfolio:
If your clients own shares in a company, they might be able to earn a steady income stream through cash dividends. Companies pay dividends to shareholders on a regular basis, often quarterly, from the profits they earn.
To get big dividend cheques, an investor will have to invest a significant amount of money and spend the time conducting research on good stocks. The key is finding well-established companies with a long history of paying dividends to shareholders. A good example is Canadian bank stocks.
You can check out our guides below on how to invest in stocks from some of Canada’s biggest banks, complete with prices and analysis:
However, dividend payments aren’t always guaranteed. If the business is struggling or the economy is weak, a company might choose to cut or suspend payments.
Dividend exchange-traded funds (ETFs) and index funds consist of shares from several dividend-paying companies. Compared to stocks, these investment vehicles offer exposure to more companies. This built-in diversification provides protection against losses.
ETFs and index funds are managed by professional managers who pick the funds on your clients’ behalf. This hands-off approach makes these types of investments among the most attractive passive income sources for investors. ETFs and index funds pay out regular dividends just like stocks.
Find out the similarities and differences between ETFs and mutual funds in this guide.
If you have clients who want to get exposure to the real estate market while earning passive income, then buying an investment property is a good option. Investment properties are designed for the sole purpose of making a profit.
Your clients can earn money through rental income if they prefer a long-term approach, or resale of the property if they’re into short-term investments (although it may be time to very catious of this approach with the volatility in the real estate market). They can have both if they own multiple investment properties.
Depending on their investment goals, your clients can choose between residential and commercial investment properties. Discover more about how to invest in real estate in this guide.
If your clients want to avoid dealing with property maintenance and bad tenants, investing in real estate investment trusts (REITs) can be a good alternative. REITs work like mutual funds, but instead of trading stocks, investors trade shares of real estate properties.
REITs are a smart passive income idea if your clients want exposure to the real estate market but don’t have enough funds to buy an investment property. Just like mutual funds, REITs provide built-in diversification. REIT shares sell at a relatively low price. Investors can also sell them quickly if needed.
Check out this list of the 10 best-performing Canadian REITs to give your clients more options.
Mortgage insurance corporations (MICs), sometimes called mortgage investment funds, work like mutual funds by pooling money from investors. But instead of using the funds to buy stocks or bonds, MICs pool mortgages. MICs offer loans to mortgage brokers, which then loan the money to real estate developers or aspiring homeowners.
By investing in MICs, your clients become shareholders. As borrowers make interest payments on the mortgage, your clients can receive interest income in the form of dividends. Check out this guide for more on the benefits of joining MICs.
Guaranteed investment certificates (GICs) are among the most popular low-risk investments and passive income strategies in Canada.
GICs work by guaranteeing your clients’ investments while allowing the money to earn interest at a variable or fixed rate. Once the GIC matures, your clients can get the original amount back plus interest earned. GICs are covered by the Canada Deposit Insurance Corporation (CDIC).
Term lengths vary from 30 days to 10 years. Some GICs allow investors to withdraw funds without penalties. Others prohibit withdrawals for the entire term.
Many Canadian banks offer high-yield savings accounts. These accounts have interest rates higher than traditional savings accounts. High-interest accounts are considered among the safest passive income sources.
However, the value of your clients’ money is influenced by the movement of interest rates. Find out the pros and cons of high-yield savings accounts in this guide.
The Canada Revenue Agency (CRA) guidance for financial institutions describes passive income as income that comes from simply holding property, rather than from running an active business.
For corporations, the Income Tax Act groups this kind of income under investment income or aggregate investment income. This covers:
For your clients who own Canadiancontrolled private corporations (CCPCs), this investment income is generally treated as passive. This is in contrast to active business income earned from providing goods or services.
For individuals, passive income is taxed differently depending on the type. Interest and foreign dividends are fully included in taxable income and taxed at your client’s marginal rate. Canadian dividends are grossed up and then receive a dividend tax credit. This reduces the final tax on that income.
Net rental income is taxed as property income after deducting allowable expenses, with limits on how much capital cost allowance can be claimed.
Bukhari lists several factors that investors should consider when selecting a passive income strategy. He says that “investors should start by clearly defining their goals, time horizon, and risk tolerance.”
“From there, it’s important to consider the tax treatment of each investment. Does it produce interest income, dividends, capital gains, or return of capital?” Asset location is another important factor to consider, Bukhari says. This means that investors need to determine which account types to hold the investments in.
“Interest-bearing products might be better suited for registered accounts like RRSPs, while capital gains could benefit from tax-free growth in a TFSA. Products that distribute return of capital might be best held in non-registered or corporate investment accounts for optimal tax efficiency.”
Meanwhile, Wagner emphasizes the importance of factoring in today’s rates when it comes to generating passive income.
“Ideally, [your clients] don’t want to lock in everything at current rates, since that can limit [their] ability to take advantage of future rate increases,” she says. “That’s where a laddered strategy comes in. It helps [investors] stagger maturities and reinvestment opportunities over time, so [they’re] not stuck with the same rate.
“Different investments, like rental properties, can offer higher returns, but they also require more time and come with less liquidity. Balancing these different factors, along with considering fees, taxes, and the potential risks, ensures [your clients’] portfolio stays flexible.”
According to Wagner, setting up a diversified strategy that works for long-term financial goals is the most effective way to earn passive income.
“Focus on investments like dividend-paying stocks, ETFs, and REITs, which help create consistent income streams,” she says. “For clients looking for additional yield, covered call writing funds can be a great option to generate premium income over existing assets. If [your clients are] open to more active investments, rental properties and other ventures can also contribute to [their] income plan.”
Bukhari lists private and public REITs, dividend-paying stocks and ETFs, bonds, GICs, and MICs as effective sources of passive income.
“Outside of traditional investment products, investors can also earn passive income through direct property ownership, such as rental income and business ownership (i.e. royalties and licensing fees),” he adds.
According to both experts, investors can use a combination of passive income strategies that match their preferences, risk tolerance, and investment time horizon.
Finding ideal ways to earn passive income involves several steps. Here are some key pieces of advice from Wagner:
Bukhari also stresses the importance of seeking guidance from a qualified professional.
“It’s essential to work with someone who has a deep understanding of passive income strategies and who can offer tailored, holistic advice,” he says. “Look for professionals who can clearly explain complex concepts in layman’s terms.
“[They should also] be able to integrate asset allocation and asset location strategies and ultimately provide recommendations that align with [your clients’] financial goals and personal circumstances.”
A thoughtful, well-structured passive income plan can be a game-changer for long-term financial health. If you’re searching for industry professionals to inspiration and guidance, our Best in Wealth Special Reports page is the place to go.
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