All you need to know about RESP's

A Registered Education Savings Plan (RESP), sponsored
by the Canadian government, encourages investing in a child's future
post-secondary education. Subscribers to an RESP make contributions that build
up tax-free earnings. The government contributes a certain amount to these
plans for children under age 18.
Contributors do not receive a tax deduction for
investments in an RESP. There are no taxes due until funds are taken out to pay
for a child’s education. At that time, contributions made into the RESP are
returned tax-free, although contributors’ earnings from the plan are taxed.
Money the government pays out is taxed to the students. However, since a large
number of students have little to no income, many can withdraw the money
tax-free.
A RESP lets parents in Canada begin saving for their
children’s education at birth, with the government pitching in part of the tab.
Parents or guardians simply walk into a bank, credit union or other financial
institution to open up an account. Anyone can contribute, whether it's mom,
dad, neighbor, or a favorite aunt or uncle.
The federal government then matches the money up to a
certain percentage and deposits it into the child’s RESP. The extra funds the
government deposits are called the Canadian Education and Savings Grant. The
amount provided is graduated, based on family income. Matching benefits apply
only on the first $2,500 in contribution per year. The amount of the grant is
capped at a maximum of $7,200.
Once in college, the child receives educational
assistance payments (EAPs). These EAPs count as income for the child
(beneficiary). If the beneficiary doesn't receive payments - either by the
choice of the contributor or because the beneficiary does not attend a
post-secondary institution, the contributor will receive the amount in the RESP
back tax-free.
The number of allowed plans per child is unlimited.
However, there is a lifetime contribution limit of $50,000 per beneficiary from
all RESPs combined.
Pros and Cons of Registered Education Savings Plans
Generally, the plans are easy to access and provide strong
investment incentives. Because parents won't initially pay taxes on the money,
they have a dual incentive to save for their child's education; they avoid
paying taxes and get bonus money from the government for the child's education
in the process.
There are a few catches. If a child doesn't pursue an
approved post-secondary education training program, such as college or trade
school, within 36 years of opening the account, the government can request the
grant money back. Also, any investment earnings that are withdrawn from the
RESP that are not used for education-related expenses incur income tax plus an
additional 20% penalty.