Line an 8 inch square baking pan with aluminum foil or parchment paper.
Combine the vanilla chips and sweetened condensed milk in a saucepan over medium heat. Stir frequently until mixture melts, remove from heat and continue to stir and melt until smooth. When chips are completely melted, quickly stir in the peppermint extract, food coloring, and candy canes reserving 1/2 cup for the top..
Pour fudge mixture evenly in the bottom of the prepared pan and sprinkle with remaining 1/2 cup on top and gently press down. Chill for 2 hours, then cut into squares.