Best Passive Income Ideas in Canada: What Each Pays and How It Is Taxed

Passive income here means money that keeps coming in after the work or the investment is done: interest, fund distributions, rent, and sales of something you made once. This page compares the main options by what they need up front, how much work continues, what can go wrong and how the income is taxed. It is part of the side hustles hub; for income you earn by the hour, see best side hustles in Canada and how to make money online, and for renting out space, how to make money on Airbnb.

How the options compare

“Best” depends on what you have more of, money or time, and on how much risk to your capital you accept. The table sets the options side by side on those points.

Interest: GICs and savings accounts

A GIC pays a fixed rate for a set term, and a savings account pays a rate the institution can change at any time. Posted rates at two online institutions:

Both post the same GIC rates for registered (TFSA, RRSP) and non-registered GICs. Rates change without notice; best GIC rates and best HISA rates compare more institutions. At a CDIC member, eligible deposits are insured up to $100,000 per insured category; are GICs safe explains the categories and the credit-union equivalents.

A GIC ladder splits the money across terms so part of it comes due every year or two, which spreads out the risk of renewing everything at a low rate. GIC laddering covers how to set one up.

Dividend, covered-call and REIT ETFs

An ETF pays out the dividends (or rent, for a REIT fund) earned by what it holds. The distribution yield is the payout as a percentage of the unit price, as each provider publishes it. A covered-call ETF also sells call options on its holdings, which adds option income to the payout but gives up part of any rise in the stocks; see covered-call ETFs.

A yield is not a promise: a fund can cut its distribution, and the unit price can fall while the payout continues. Best dividend ETFs and REIT ETFs compare the funds in more detail.

How much money a target income takes

The amount needed is the yearly income divided by the yield. The table uses three of the rates and yields above, before tax, and assumes they stay where they are, which market yields don’t.

A higher yield needs less money for the same income, but a covered-call fund gives up part of the rise in its stocks to pay it, and no ETF payout is fixed the way a GIC’s interest is.

Rental property

Owning a rental needs the most money up front of these options, and it comes with continuing work as a landlord. The down payment rules for a property you won’t live in are on investment property mortgages. Rent has to cover the mortgage, property tax, insurance, repairs and empty months before anything is left over.

A higher mortgage rate or a few empty months can turn the result negative; the rental property calculator and positive cash flow pages work through the numbers. On tax, the CRA treats rent as income from property when you provide basic services only, and says that “the more services you provide, the greater the chance that your rental operation is a business”. How to report rental income covers Form T776 and the deductible expenses. A REIT ETF (above) earns rental income without owning or managing a property.

Digital products, books and courses

Online courses, e-books, templates, stock photos, print-on-demand designs, blogs and video channels take time up front and pay only while they keep selling; sales can be zero. Marketplaces such as Etsy, Amazon Kindle Direct Publishing and Udemy handle payment and delivery and keep a share of each sale, set out in each one’s own terms. How to make money online and the freelancing guide cover the business side.

Income from selling what you create is business income, reported on Form T2125 (how to complete the T2125). Two rules apply once it grows:

• GST/HST. You have to register for the GST/HST once you make taxable sales in Canada and are no longer a small supplier: that happens when your taxable sales go over $30,000 in a single calendar quarter (register from that sale) or over the last 4 consecutive calendar quarters (by the end of the month after that quarter); below that you can register voluntarily.
• CPP. You contribute to the CPP if you are over 18, work in Canada outside Quebec and earn more than $3,500 a year; contributions stop when you turn 70, and from 65 someone already receiving a CPP or QPP retirement pension can choose to stop. Self-employed people pay both the employee and the employer share of CPP contributions on their net business income (11.90% above the basic exemption up to the first earnings ceiling, plus 8% CPP2 between the first and second ceilings), worked out on Schedule 8 and paid with the income tax return. A non-refundable tax credit is claimed on half of the base contributions, and the other half, the first additional contributions and all CPP2 contributions are deducted from income.

Where to hold investment income: TFSA, RRSP or a taxable account

• TFSA. The CRA describes it as an account that “can hold cash savings and investments that generate tax-free income”, and withdrawals are tax-free. New room for 2026 is $7,000. Income earned in a TFSA and TFSA withdrawals don't reduce federal benefits such as OAS, GIS and EI, or credits such as the Canada child benefit, the Canada workers benefit and the Canada Groceries and Essentials Benefit (formerly the GST/HST credit). See the TFSA hub.
• RRSP. Income earned in an RRSP is usually exempt from tax as long as the funds remain in the plan. You generally pay tax when you receive payments from an RRSP. Your RRSP deduction limit is your unused room from past years plus the lesser of 18% of last year's earned income and the year's dollar limit, minus your pension adjustment, plus any pension adjustment reversal and minus any net past service pension adjustment. Under Article XXI of the Canada-US tax treaty, US dividends paid to an RRSP, RRIF or LIRA are exempt from US withholding; in a TFSA, FHSA, RESP or taxable account the standard 15% treaty rate applies, and only in a taxable account can it be recovered as a foreign tax credit.
• Taxable account. Interest is taxed in full: the CRA says interest and other investment income “form part of your total income and must be reported on your return”. Dividends from taxable Canadian corporations are grossed up and then reduced by a dividend tax credit; foreign dividends don't qualify. A dividend is an eligible dividend only when the Canadian corporation paying it to a resident of Canada designates it as one (eligible dividends usually come from Canadian public corporations and other corporations resident in Canada that are subject to the general corporate tax rate); other taxable dividends, usually from Canadian-controlled private corporations subject to the small business tax rate, are other than eligible (non-eligible) dividends. The taxable amount, reported on line 12000, is the dividend plus a gross-up of 38% for an eligible dividend or 15% for a non-eligible one, whose taxable amount also goes on line 12010. The federal dividend tax credit is 15.0198% of the taxable amount of eligible dividends and 9.0301% of the taxable amount of other dividends: the total of the credit amounts on your slips (T5 boxes 12 and 26, T3 boxes 39 and 51), or from the line 40425 chart of the Federal Worksheet without a slip. Outside Quebec, a provincial or territorial dividend tax credit, at the rates of the province or territory where you lived at the end of the year, is claimed on line 61520 of Form 428; Quebec residents claim Quebec's credit on their Revenu Québec return. 50% of a capital gain is taxable. The investment tax hub and how GIC interest is taxed have the detail.

Rental and business income are earned outside these accounts and taxed on your return each year.

Related guides

• Side hustles hub
• Best side hustles in Canada
• How to make money on Airbnb
• Best dividend ETFs and covered-call ETFs
• Best GIC rates and best TFSA savings accounts
• Best REITs
• Investment calculator