Practice Free PF1 Payroll Fundamentals 1Exam Exam Questions Answers With Explanation

Net pay (often called “take-home pay”) is what the employee actually receives after all withholdings and other deductions are taken from their earnings. In Canadian payroll practice, the starting point is gross earnings (regular wages plus any taxable amounts that must be included in income). From gross earnings, payroll subtracts total deductions, which include statutory deductions (such as CPP/QPP, EI, and income tax) and any authorized non-statutory deductions (for example, union dues, benefits premiums, pension contributions, or garnishments where applicable). This is why the most accurate generic formula is gross earnings ? total deductions. CRA payroll guidance reflects this structure by requiring employers to calculate gross pay, determine the correct statutory deductions, and then arrive at the amount paid to the employee after those deductions are withheld and remitted.

Options C and D are incomplete or incorrect because “total tax” is only one part of deductions, and “net taxable income” is not a payroll calculation base in the way the question frames it. Option A is also incorrect because “pensionable earnings” is only relevant to CPP/QPP calculations, not the overall net pay formula.

The CRA sets out that the “eligible” portion of a retiring allowance that may be transferred directly to an RRSP/RPP under special rules is based on years of service before 1996 (and potentially an additional amount for certain pre-1989 years if specific pension/DPSP conditions are met). The CRA explains the eligible part is $2,000 for each year (or part-year) of service before 1996, plus you may be able to transfer an additional $1,500 for each year (or part-year) of service before 1989 where no employer pension/DPSP benefit was vested (or previously paid) for those years.

This is why the correct basis in the answer choices is the employee’s years of service prior to 1996, not wages, age, or average earnings. Payroll needs this service history (including related employers where applicable) to correctly identify the eligible/non-eligible split and apply the right withholding and transfer reporting.

Service Canada’s ROE guidance states that an employer must issue an ROE each time an employee experiences an interruption of earnings and when Service Canada requests one. This makes option A true.

For paper ROEs, the ROE guide is explicit about deadlines: you must issue a paper ROE within 5 calendar days of (1) the first day of an interruption of earnings, or (2) the day the employer becomes aware that an interruption of earnings has occurred. This confirms option B.

An interruption of earnings generally occurs under the 7-day rule—when an employee has had or is anticipated to have 7 consecutive calendar days with no work and no insurable earnings from the employer. That’s why option C is also true: once the employer becomes aware the 7-day threshold is met (or will be met), the ROE requirement is triggered, and the paper ROE must be issued within the time limit above.

Block 11 on the ROE is the “Last day for which paid,” meaning the last day the employee received insurable earnings. In most terminations, this is the employee’s last day of work. Service Canada notes Block 11 only moves beyond the last day worked when the employee continues to receive insurable earnings after the last day of work due to paid leave (such as vacation leave or sick leave) or salary continuance.

In this question, Charmaine’s employment ended April 13, and she received a lump-sum final pay that included wages in lieu of notice and vacation pay. These amounts are typically reported as special payments (for example, pay in lieu of notice is reported as such), but they do not automatically change Block 11 unless they are paid as an actual paid-leave period or as salary continuance (where regular pay continues and the ROE is not issued until the continuance ends).

For separation/termination-related payroll decisions (including whether a payment can qualify as a retiring allowance and whether the relationship has truly ended), the key question is whether the employee–employer relationship is still continuing. CRA training material on “special payments and the end of employment” explains that ongoing health insurance coverage or accrual of pensionable time are indicators the employer–employee relationship is continuing.

Among the choices, the most direct, reliable indicator is continued accrual of benefits in the organization’s pension plan (option D). If pensionable service continues to accrue, the relationship is still considered to exist—meaning the relationship has not been fully severed for payroll/tax purposes.

Option C (“no expectation of work”) points the other way: that is consistent with a relationship being severed, not continuing. Option B (“refuses the right to be recalled”) is not a standard indicator of an ongoing relationship. Option A can occur in some arrangements, but the CRA specifically highlights pension accrual (and ongoing coverage) as strong evidence the relationship continues.

Step 1 — Block 6

Bi-weekly

Step 2 — Block 8

435837159

Step 3 — Block 10

September 19, 2007 ? 19092007

Step 4 — Block 11

October 28, 2019 ? 28102019

Step 5 — Block 12

October 28, 2019 ? 28102019

Step 6 — Block 15A (Total insurable hours)

80.00 × 27 = 2160

Block 15A = 2160

Step 7 — Block 15B (Total insurable earnings)

$1,884.62 × 27 = $50,884.74

Block 15B = 50,884.74

Step 8 — Block 17A (Vacation pay)

$52,050.00 × 6% = $3,123.00

Block 17A = 3,123.00

Step 9 — Block 17C (Pay in lieu of notice)

Weekly earnings = $1,884.62 ÷ 2 = $942.31

Pay in lieu = $942.31 × 8 = $7,538.48

Block 17C (Pay in lieu of notice) = 7,538.48

Step 10 — Block 17C (Severance)

Severance = $942.31 × 10 = $9,423.10

Block 17C (Severance) = 9,423.10

This is a benefit because the employer is providing access to an automobile (leased by the employer) that the employee can use for personal driving as well as business. The CRA explains that when an employer-owned or employer-leased automobile is made available for personal use, the employee receives a taxable automobile benefit, generally made up of a standby charge (availability of the vehicle) and potentially an operating expense benefit (if the employer pays operating costs and the employee has personal kilometres).

It is not an allowance (which is typically a cash amount given to the employee), and it is not an expense reimbursement (repayment of employee-incurred business expenses). It is also not an earning (pay for work performed). Payroll’s role is to track availability days/months, business vs personal kilometres, any employee reimbursements, apply the CRA calculation methods, and report the taxable benefit on the employee’s information slip with the correct taxable benefit treatment.

On the ROE, separation payments are reported in Block 17. Service Canada explains that Block 17C – Other monies is used to record “any other payments or benefits…paid…because of the separation,” whether or not they are insurable.

The ROE Guide specifically lists “Severance pay” as a type of separation money to enter in Block 17C (“Enter ‘Severance pay’ and the amount”).

Crucially, Block 15B and Block 15C are for insurable earnings totals/by pay period. The ROE Guide notes that some amounts reported in Block 17 (like vacation pay) are insurable and must be added into Blocks 15B/15C; however, retirement leave credits/retiring allowances (a form of severance-type payment) are not insurable and are not added to Blocks 15B/15C even though they are recorded in Block 17C.

So, severance is reported in Block 17C only.

Because Elodie is subject to QPP, her pensionable earnings for the pay period include both salary and commissions (both are pensionable employment earnings, assuming no exemptions apply). First, determine total pensionable earnings for the bi-weekly pay:

$1,000.00 + $4,300.00 = $5,300.00.

For 2026, Revenu Québec shows the QPP basic exemption is $3,500 annually and the (employee) QPP contribution rate on earnings up to the maximum pensionable earnings is 6.30%.

Payroll applies the exemption per pay period. For bi-weekly pay (26 pay periods):

$3,500 ÷ 26 = $134.62 (rounded to cents).

Pensionable earnings subject to QPP this pay:

$5,300.00 ? $134.62 = $5,165.38.

QPP contribution:

$5,165.38 × 6.30% = $5,165.38 × 0.063 = $325.41894, which rounds to $325.42.

For employees whose province of employment is outside Quebec (including Saskatchewan), EI premiums are calculated by multiplying the employee’s insurable earnings by the employee EI premium rate for the year, up to the annual maximum insurable earnings. For 2026, the employee EI premium rate outside Quebec is $1.63 per $100 of insurable earnings (which is 1.63%).

Jasmine earns $500.00 weekly and (based on the question) we assume all earnings are insurable and she has not reached the annual maximum. Her EI premium is:

$500.00 × 1.63% = $500.00 × 0.0163 = $8.15.

This amount is deducted from the employee’s pay and later remitted to the CRA as part of the employer’s regular payroll remittance. The maximum insurable earnings for 2026 is $68,900, but at $500 per week she would only hit the maximum later in the year (if at all), so the weekly premium calculation above applies.

For payroll income tax purposes, net taxable income starts with the employee’s gross taxable income and then subtracts only those deductions that are deductible for income tax and can be recognized at source. CRA payroll guidance shows this approach by subtracting items such as RPP contributions and union dues when determining net taxable income for calculating income tax deductions.

Gross taxable income (weekly): $750.00.

RPP contributions are deductible (the amounts reported from box 20 of the T4 are generally deductible).

Regular union dues are deductible; however, the CRA states that deductible annual union/professional dues do not include special assessments or charges for anything other than ordinary operating costs. A levy specifically for constructing a new union hall is a special assessment, so it is not deductible as union dues.

So the deductions that reduce federal taxable income here are: $18.00 (union dues) + $20.00 (RPP) = $38.00.

Net federal taxable income = $750.00 ? $38.00 = $712.00.

Service Canada’s ROE Guide is clear that vacation pay paid because of separation (termination/layoff) must be reported in Block 17A – Vacation pay.

But it doesn’t stop there. Vacation pay is generally insurable earnings, so when you enter insurable earnings in Block 17A, you must also add those amounts into Block 15B (Total insurable earnings) and into Block 15C, Pay Period 1 (P.P. 1) as applicable. The ROE Guide explicitly states: when you enter insurable earnings in Blocks 17A/17B/17C, you must also add them to the totals in Blocks 15B and 15C (P.P. 1 field)—and it gives the example that vacation pay paid on separation must be added to 15B and 15C because it is insurable.

Therefore, vacation pay on termination is recorded in Blocks 15B, 15C P.P. 1, and 17A (option C).

Regular earnings for an hourly employee are calculated as hourly rate × hours worked. Because “bi-weekly” means two weeks of work paid together, you calculate one week’s regular earnings and then multiply by two (assuming the hours are the same each week and there is no overtime premium indicated).

Step 1: Weekly regular earnings:

$10.10 × 37.5 hours = $10.10 × 37 + $10.10 × 0.5

= $373.70 + $5.05

= $378.75.

Step 2: Bi-weekly regular earnings (2 weeks):

$378.75 × 2 = $757.50.

So Matt’s regular bi-weekly earnings are $757.50.

In payroll documentation, “regular earnings” are the employee’s base wages before statutory deductions (CPP/QPP, EI, income tax) and before other deductions, and they exclude any separately calculated earnings like overtime premiums or taxable benefits unless stated. This approach (rate × hours, then adjust for pay period) is the standard method used to compute gross/regular pay for hourly employees before moving on to deductions and net pay.

A defined benefit (DB) pension plan promises a future pension benefit based on a formula (for example, service and earnings). Because the benefit is defined, the plan must ensure it is adequately funded to meet future liabilities. That requires actuarial valuations—professional studies that forecast future obligations and determine required contributions. Regulators describe DB plan funding as being based on actuarial calculations and require administrators to file actuarial valuation reports to establish funding and contribution requirements.

A defined contribution (DC) plan does not promise a specific future pension amount; contributions are defined, and the retirement outcome depends on investment performance—so it does not require the same ongoing actuarial funding valuations for promised liabilities. An RRSP is an individual savings plan, not an employer DB plan requiring actuarial funding reports.

Therefore, the correct answer is Defined benefit pension plan (option A).

Even though the question uses the word “reimbursed,” the key fact isno receipts. In CRA terms, when an employee is paid a set amount or is not required to substantiate the expense, the payment functions like anallowance, not an accountable reimbursement. CRA’s guidance on uniforms/special or protective clothing states these amounts aregenerally taxable, and only in specific circumstances under CRA administrative policy would they be non-taxable.

CRA interpretations also reinforce that where employeesdo not have to provide receipts, a clothing allowance is generally ataxable employment benefit; non-taxable treatment is linked to substantiation and meeting strict conditions (for example, safety footwear with receipts).

So, because Helen’s payment isnot supported by receipts, it is best classified as ataxable allowance(option A). Payroll should include the amount in taxable income, apply required withholdings as applicable, and ensure policy/records support whatever treatment is used.

The CRA defines a death benefit as the gross amount of any payment made on or after the death of an employee to recognize the employee’s service in an office or employment. It can be paid to a surviving spouse/common-law partner, heir, or the estate.

This is different from amounts the employee already earned before death (for example, regular wages up to the date of death, or vacation pay that was accrued/earned). CRA guidance treats wages and employment income earned up to and including the date of death as amounts to be reported on a T4 slip, not as a death benefit.

It’s also different from a life insurance payout from an insurer (which is not an employer-paid “death benefit” for payroll reporting purposes). The payroll impact is that a qualifying death benefit is generally reported as a special payment (often on a T4A), following CRA rules for deductions and reporting of death benefits.