RESP’s are intended to provide for the post-secondary education of named "beneficiaries", typically children or grandchildren, through tax deferral and income splitting.
As a contributor, you are not entitled to a deduction in respect of your contribution; however, the interest income (or other investment income) earned in the plan on your contribution is not taxed in your hands. Rather, the investment income earned in the plan is accumulated free of tax and will be taxed in the student’s (child’s) hands only when the child receiveS funds from the plan.

The benefits of an RESP arise through three mechanisms:
tax deferral, in the contributions you make to the plan which earn income in the plan are not currently subject to tax; accordingly income accumulates more rapidly in the plan than it would in the hands of the contributor;
income splitting, in that when amounts are paid out of the plan for the post-secondary education of a beneficiary they will be taxed to the beneficiary, whose tax rate is typically lower at that time than the contributor’s tax rate; and incentive grants, in that the government will actually match contributions with 20% grants paid to the plan on contributions of up to $2,000 per year.

Contributions to an RESP may not exceed:
for 1997 and later years, $4,000,with an overall limit of $42,000 per beneficiary.

Commencing in 1998, refunds of RESP earnings may be made to a contributor where none of the intended beneficiaries is pursuing post-secondary education by age 21 and the plan has been in place for at least 10 years. Earnings so returned will be taxable income, but not earned income for RRSP purposes. However, returned plan earnings may be contributed to an RRSP or the contributor or the contributor’s spouse to the extent the contributor has adequate RRSP contribution room. Plan earnings received by the contributor which are not contributed to an RRSP (whether because they exceed RRSP contribution room or otherwise) are subject to a special tax of 20% in addition to regular tax payable.

The benefits of RESP’s must be weighed carefully, not simply in tax terms, but with an understanding of plan provisions in the event that beneficiaries do not ultimately attend designated schools, within the anticipated time frame.

Planning Point:
Recent changes to the RESP rules in general make these plans far more attractive as a vehicle for setting aside savings for the higher education of your children, grandchildren, or other young relatives; If you have invested in a RESP and it begins to appear that no beneficiary will use the plan before its mandatory 25 year expiration, you should consider forgoing RRSP contributions, if necessary, to ensure adequate contribution room to cover a return of plan earnings. Remember that only earnings give rise to income; contributions can be returned without tax consequences to the extent of contributions made to the plan. If you wish to purchase RESP’s and want to take advantage of the government grant, you must purchase them during the calendar year. In order to receive the government grant for 2003, of matching your contribution, (up to a maximum of $2,000) you must purchase your RESP before the end of December, 2003.