RESP's, allow individuals to contribute up to $4,000 per year to fund the post secondary education of a qualified beneficiary. The lifetime contribution limit in respect of a beneficiary is $42,000 over a maximum of 21 years. Contributions are not deductible when they are contributed to the plan and, accordingly, they are not taxable when the plan allows for their withdrawal. Since neither the subscriber nor the beneficiary are taxable on the income that the RESP earns from year to year, they act like an RRSP, and so the income is tax sheltered. The accumulated investment income is taxable to the beneficiaries as they receive the funds to pay for educational expenses of post-secondary educational institutions, which are called "educational assistance payments"

Beginning in 1998, the federal government effectively increased the attraction of saving through an RESP by providing Canadian Educational Savings Grants (CESG). These grants account for 20% of the first $2,000 of annual contributions to an RESP for children up to the age of 18. The maximum CESG that can be paid to an RESP in respect of a particular beneficiary is $7,200 (i.e. $400 X 18 years of age)

CESG contribution room of $2,000 per year is accumulated for each child under 18 years of age. Therefore, where less than the maximum or no contribution is made in the year, the 20% grant will be paid in a subsequent year until the contribution is made. If the child does not pursue a higher education that qualifies for educational assistance payments then the CESG must be repaid to the government by the RESP. Any income earned from the grants may, however, be kept by the RESP.

An RESP is also permitted to distribute any part of its accumulated income to the subscriber under the following conditions:

1. The subscriber is alive;
2. Each beneficiary of the RESP is either a) over 21 years of age and not eligible to receive educational assistance payments; or b) has died.

While this distribution is included in the subscribers income, it may be rolled over (and effectively treated as a contribution) to an RRSP (which includes spousal plans), provided that the subscriber has the contribution room. There is a limitation on this roll over of $50,000. To the extent that this distribution is not rolled over, there is a 20% tax imposed.