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An RESP is an attractive way to save for a child's post-secondary education. The contributions - plus the Federal Government's "Canada Education Savings Grant" (CESG) of 20% on the first $2,000 of annual contributions - earn tax-free income inside the plan. The maximum CESG is $400 per year per child.

RESPs are most commonly used by parents for their children. However, with certain restrictions, you can set up a plan for whomever you want, including yourself or your spouse. The individual who enters the RESP contract is called the "subscriber" and the individual on whose behalf the contract is entered into is called the "beneficiary."

The maximum annual contribution is $4,000 per child to a cumulative lifetime maximum of $42,000. A child can be designated in several plans up to the maximum amount. Missed RESP contributions cannot be carried forward. However, the CESG availability can be carried forward and paid on contributions of up to $4,000 per year until used, or the year in which the child attains age 17. The CESG is not included in calculating the annual and lifetime contribution limits.

RESP proceeds must be used within 25 years of the start of the plan. if a child decides not to attend a post-secondary educational institution, a different child can be appointed as the beneficiary of the plan. if no child uses the RESP proceeds within the allotted time, the CESG portion returns to the government and the contributions are returned to the contributor. The investment income earned within the plan can be donated to a Canadian post-secondary educational institution or, under certain conditions, may be transferred to the contributor's RRSP. It can also be returned to the contributor, but a penalty tax of 20% is assessed.

Although the RESP contributions are not tax-deductible, the income earned on those contributions - as well as income earned on the annual CESGs - are sheltered from income tax until withdrawn by a child. Because the child is taxed on the accumulated income, and will probably be in a lower tax bracket than the parent when the funds are withdrawn, the parent effectively benefits as a result of splitting family income.