Tuesday, April 21, 2009

Dealing with a Variable Income

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.


  1. If you don't want to miss out on time in the market you can make regular RRSP contributions but only claim them in the good years. I haven't claimed any of my contributions yet because I've been getting a higher return from waiting for the next tax bracket (due to rising income). When I expect to be in the same bracket for 2-4 years I'll claim them.

    For me it's more month-to-month changes than year-to-year, but if someone was in a situation like that they might be able to re-arrange some deductible expenses as well to only be in the up years. I can't think of any strategies more complicated than that at the moment :)

  2. SliconPrairieBlog: You make a good point. You can make RRSP contributions each year, but only claim them in years with a high income.