Registered Education Savings Plans are savings accounts for future post-secondary education costs that can grow on a tax-deferred basis for up to 25 years. You can contribute annually with a lifetime ceiling of $50,000 per beneficiary.
The federal government wants to encourage families to save for their children’s education, so it offers an incentive. Opening an RESP makes you eligible to receive the Canada Education Savings Grant to top up your contributions by 20 to 40%, based on family income, on the first $2,000 of annual contributions.
The earnings on RESP contributions and on the Canada Education Savings Grant are taxed upon withdrawal in the hands of the beneficiary. Since most students have little or no income, the RESP withdrawals do not create a tax burden for them.
If the beneficiary does not go to university, the contributor can transfer $50,000 of the balance in the RESP account to an RRSP. What is the downside? If the contributor has insufficient RRSP contribution room the remainder must be withdrawn and the accumulated growth in the account will be taxed as income. Also, the contributor will have to repay all of the Canada Education Savings Grants received.
One thing to bear in mind is that contributions to a RESP are not tax deductible. RESPs differ from RRSPs in that contributions do not reduce taxable income. The main advantages of RESPs are tax-sheltered earnings, the grant from the federal government and a disciplined approach to saving.