Children's education savings plan (RESPS) is very important with  parent's wondering how best to prepare for their child's university education. 

The registered education savings plan (RESPS) have been enhanced in the last three years to make it a more attractive vehicle to save for your child's future education. 

A RESP is set up by a parent or grandparent who contributes to the plan and names a beneficiary who must be related to the parent or grandparent.  Contributions of up to $4000.00 can be made each year to a maximum of $42000.00 lifetime.  The income earned in the plan is not subject to tax while in the plan and is only taxable in the student's hand when they draw it out for tuition.  Therefore if the student has very little other income it could be mostly non-taxable in the student's hand. 

If the beneficiary (student) does not go to university, the capital comes out tax free and the income can either be taxed in the parents hand subject to an additional 20% tax or in some cases can be put into the contributor's RRSP or transferred to a brother or sister who is attending university.

The February 1998 budget introduced a new "Canada Education Savings Grant" (CESG).  The CESG is an additional 20% grant contributed by the federal government on up to $2000.00 per year of contributions (i.e., up to $400.00 of grant per year), with a lifetime maximum of $7200.00 (18 years x $400.00).  The grant will be paid to the RESP and can be invested within the RESP along with other funds.  It is available for beneficiaries up to and including age 17.  Unused contribution room can be carried forward to future years when contributions are made.

The CESG will be included in the student's income when funds are paid out of the RESP to the student.  However, as with other income earned in the RESP, it will be received by the student who may be in a very low tax bracket, and little or no tax may thus need to be paid on it.

If the student does not attend higher education, the CESG must be paid to the government.