Most of us prefer a nice steady income rather than a highly variable income. However, one of the advantages of a variable income is the up years. Unfortunately, with an up year comes an increase in income taxes.
A consequence of our progressive tax system is that people with variable incomes end up paying more income taxes. If Ted makes $50,000 per year and Alice has alternating years of $25,000 and $75,000, Alice will pay more tax (assuming that everything else is equal) even though they have the same average income.
One way for Alice to compensate for this unfairness is to make RRSP contributions only during her higher income years. Compared to making her contributions every year, this strategy gives her a bigger tax reduction for the same total contribution.
So, if you have the happy circumstance of earning more money than usual in 2009, consider using some of the extra money to catch up on RRSP contributions. You might also consider making some necessary home repairs to take advantage of the Home Renovation Tax Credit.
I’m in the unhappy situation of having to declare a large chunk of income in 2009 without actually having received the money. Coincidentally, I’m going to have to replace my furnace and roof this year. At least my accumulated RRSP room and Home Renovation Tax Credit will give me tax savings at the top marginal rate.