Income averaging is an old idea that deserves another shot

financialpost.com:

There are a lot of good things about getting older. One of them in my work life is that I recall the “good old days” with respect to certain taxation matters.

Yes, indeed, there are many good things in taxation policy that have been eliminated over the years, but as time has passed, one wonders if consideration should be given to thinking about the lessons learned and whether such lessons mean giving those policies another shot.

One of those lessons is in averaging income. With the progressive taxation system that Canada has, you pay more personal income tax as your income increases. That is generally fair.

But what happens if you have a once-in-a-lifetime monetization event such as being fired from your job and you receive a significant severance amount? Or you receive some sort of significant damages from a lawsuit and such amounts are taxable (some forms of damages are not taxable and I’m not talking about those forms). Or you withdrew, for a variety of financial reasons, a significant amount of money from your various registered pension funds? Or you receive a dream offer for the sale of your business?

All the above are examples of when you might pay significant income taxes for a short period of time, in many cases, in the one and only year, and then your income will regress in the following years to more modest and normal levels. Is it fair that those types of spikes in income will result in significant taxation? Some economists call this extra spike in tax the “fluctuation penalty.”

Canada’s first and only Royal Commission on Taxation from 1962 to 1966 (which studied the income tax system and published a report and its recommendations) spent significant time on this issue. It recommended forms of income averaging