Anything you draw out of the TFSA, whether it is capital gain, interest, or dividend income, is all tax-free. If the investment is held elsewhere in a non-registered account, then the dividend income is considered taxable. In the example, because the high-paying dividend stock is in a TFSA, the dividend income isn’t taxable. Another advantage of holding this type of investment in a TFSA is the possibility to avoid some clawback issues due to the 38% dividend gross-up. This happens as a result of the gross-up being applied to your income prior to benefits such as the OAS, age credit, and GIS being calculated. The dividend tax credit will reduce your income back at the end of your tax return, but the timing of the credit may have resulted in reducing your benefits.

Read more: Do I pay tax on dividends after I withdraw my fund from a TFSA?