Q: My income fluctuates quite widely from year to year. How do I plan for this and how do I handle the tax implications of such income swings?
A: Yours is the challenge of many a commissioned salesperson or business owner, David. The thought of a stable salary and defined benefit pension plan may be appealing to some, but others, like you – and me – prefer a little more control over destiny. That control doesn’t always mean stability, however.
For starters, I think everyone should have a reserve or emergency fund, particularly those whose jobs are riskier or whose income is variable. An emergency fund doesn’t necessarily mean having six months of expenses sitting in a savings account earning pennies in interest. It could mean a healthy TFSA balance that includes an allocation of conservative, liquid investments. It could mean a secured line of credit available with a low interest rate.
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Having tens of thousands of dollars sitting idle for your whole life may be comforting, but it could usually be put to better use invested in an RRSP or TFSA or used to pay down debt.
So, the concept of an emergency fund, David, can