An RESP is a tax-deferred education savings vehicle. The contributor invests funds for a beneficiary or beneficiaries' post-secondary education.

Deposits to an RESP are not tax-deductible. However, income and capital gains that accumulate are tax-free until the child begins post-secondary education and starts to receive payments. Any amount exceeding the original contributions is taxable when withdrawn. Since most post-secondary students have little to no taxable income, the tax burden will be little to none.

The other positive about using an RESP is the contributions will generate the Canada Educations Savings Grant (CESG). The beneficiary can receive the maximum annual CESG of $500 by contributing $2500 annually. The CESG is 20% of every dollar contributed. There is a lifetime CESG limit of $7200.

The other grant available in an RESP is the Canada Learning Bond (CLB). The CLB will give $500 in the first year, and $100 each year until the beneficiary turns 15. To be eligible for the CLB, the beneficiary has to be born after December 31st, 2003 and their family has to be receiving the National Child Benefit Supplement. This is usually received by lower-income households.

Planning Strategies:

Maximize contributions in early years. The sooner the contribution is made, the greater effect of long-term, tax-sheltered compounding.
Maximize annual RESP contributions to receive the maximum annual CESG.

Note: There is a lifetime RESP contribution limit of $50,000.

What happens if my child ends up not attending post-secondary education?

You can move the cash to an RESP held in the name of a sibling.
Transfer up to $50,000 from the RESP to your own RRSP provided you have sufficient contribution room.