PF1 Payroll Fundamentals 1Exam Questions and Answers

The CRA defines a retiring allowance (also called severance pay) as an amount paid when or after an employee retires or loses their job, in recognition of long service or for the loss of employment.

However, the CRA is also explicit about what a retiring allowance does not include. It does not include “salary, wages, bonuses, [or] overtime,” which rules out bonus/incentive pay and accumulated overtime in the options. It also does not include “payments for accumulated vacation leave not taken,” which rules out vacation pay as a retiring allowance. Finally, it does not include wages in lieu of termination notice, which rules out wages in lieu (including legislated notice pay) as a retiring allowance.

Because every listed item is specifically excluded by CRA guidance, the correct answer is None of the above (E).

In a Defined Contribution (DC) pension plan, contributions are calculated as a set percentage of the employee’s pensionable earnings, and the total remittance is usually the sum of the employee deduction plus the employer’s matching contribution, based on the plan text. Here, the plan states the employee contributes 3% of pensionable earnings, and the employer matches the employee contribution.

Step 1: Calculate the employee’s pension contribution:

3% × $3,400.00 = 0.03 × 3,400.00 = $102.00.

Step 2: Calculate the employer match:

Because the employer matches the employee contribution, the employer contributes $102.00 as well.

Step 3: Total remittance to the plan:

$102.00 (employee) + $102.00 (employer) = $204.00 each month.

From a payroll processing perspective, the employee amount is withheld from gross pay as a payroll deduction according to plan rules, while the employer match is recorded as an employer expense. Payroll remits both amounts to the plan administrator following the plan’s remittance schedule, and should reconcile pensionable earnings and contributions to ensure accuracy and compliance with plan terms.

Employer-provided parking is often a taxable benefit, generally valued at the fair market value of the parking spot. However, the CRA provides a specific exception for employees with disabilities. CRA guidance on employer-provided parking states that if your employee has a disability, the parking benefit is generally not taxable, including situations involving a severe and prolonged mobility impairment or blindness.

In Steve’s case, the fact pattern explicitly says he is physically disabled and the employer pays for his parking. Under CRA’s general rule for disability-related parking, this would generally not be included in income as a taxable benefit, meaning it is not a taxable allowance and not a taxable benefit (cash or non-cash) for payroll purposes.

Payroll should still document why the parking is being treated as non-taxable (for example, disability-related need) and ensure the treatment aligns with CRA guidance if questioned. If the facts were different (non-disability parking or preferential parking provided to employees generally), the taxable benefit rules would usually apply.

Anne has both an automobile standby charge (because the car was made available) and an operating expense benefit (because the employer paid operating costs and she did not reimburse).

1) Standby charge (leased auto): Lease cost for standby charge purposes includes GST and excludes insurance.

Monthly lease incl. GST = $198.60 × 1.05 = $208.53.

Standby charge per month = 2/3 × $208.53 = $139.02.

Days available ÷ 30 = 365 ÷ 30 = 12.17, rounded to 12.

Annual standby charge = $139.02 × 12 = $1,668.24.

2) Operating expense benefit: Personal km = 34,134 − 15,805 = 18,329.

Optional method requires the automobile be used primarily (>50%) for business; Anne’s business use is under 50%, so the optional method does not apply and the fixed rate must be used.

Fixed rate (2026) = $0.34/km → 18,329 × 0.34 = $6,231.86.

Total taxable benefit = $1,668.24 + $6,231.86 = $7,900.10.

First calculate Ronda’s pensionable earnings for the week. Her gross pay is:

$12.50 × 40 = $500.00.

CPP is calculated on pensionable earnings after subtracting the basic exemption (the Year’s Basic Exemption, YBE), prorated to the pay period. The CRA confirms the YBE is $3,500 and the employee CPP contribution rate for 2026 is 5.95% for base CPP.

Weekly exemption = $3,500 ÷ 52 = $67.31 (rounded to cents).

Pensionable earnings subject to CPP this week = $500.00 − $67.31 = $432.69.

CPP contribution = $432.69 × 5.95% = $432.69 × 0.0595 = $25.745…, which rounds to $25.75.

This deduction continues each pay until the employee reaches the annual CPP maximum contribution for the year (at which point CPP stops for the remainder of the year).

For payroll deductions, the key concept is the employee’s province of employment (POE)—not where they live. The CRA states that the POE is determined primarily by the employer’s establishment where the employee “reports for work.” If an employee reports for work at an employer’s establishment located in Quebec, then the POE is Quebec, even if the employee’s province of residence is Ontario.

This matters because Quebec has distinct payroll requirements. The CRA notes that when the POE is Quebec, employers must apply Quebec-based payroll rules, including deducting Québec Pension Plan (QPP) contributions instead of CPP, and deducting Québec parental insurance plan (QPIP) premiums, along with Quebec provincial income tax withholding.

In practice, payroll must set up the employee using Quebec as the POE and ensure stakeholders (HR, finance, the employee) understand why deductions may differ from Ontario residents working in Ontario. Any over/under-withholding due to POE vs. residence is typically reconciled when the employee files their personal tax return.

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.

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.

The “eligible portion” of a retiring allowance (the part that may be transferred directly to an RRSP/RPP on a tax-deferred basis without using regular RRSP room) is based on years of service before 1996 (and potentially an additional amount for certain pre-1989 years). CRA explains that the eligible part is: $2,000 for each year or part-year of service before 1996, plus an additional $1,500 for each year or part-year of service before 1989 only if no employer-funded pension/DPSP benefits for those years were vested (or previously paid out).

Raminder was hired in January 1997, so he has zero years (or part-years) of service before 1996, and therefore he has no base eligible amount under the $2,000-per-year rule. Because he also has no pre-1989 service, the additional $1,500-per-year rule does not apply either.

So, the eligible portion is $0, meaning none of the $10,000 retiring allowance is eligible (option D).

For apaper ROE, Service Canada’s ROE guidance uses a set number ofmost recent consecutive pay periodsto support the reporting of insurable earnings. InBlock 15C(insurable earnings by pay period), the paper ROE provides27 fields, which allows reporting up to27 weekly pay periods(or fewer if the employee worked fewer periods).

Block15Bis thetotal insurable earningsfor the applicable number of consecutive pay periods, and for a weekly payroll this aligns with the same maximum count used on the paper ROE earnings grid—27periods.

Practically, this means payroll totals the employee’s insurable earnings for thelast 27 consecutive weekly pay periodsleading up to the interruption of earnings (or the full period of employment if shorter). Using the correct number of pay periods ensures Service Canada has the right earnings history to adjudicate EI benefits accurately and reduces ROE processing issues.

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.

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.

Salary continuance means the employee continues to receive regular pay (and often benefits) for a period after their job ends. In this arrangement, the payments are treated like regular employment income for payroll purposes, so the usual payroll deductions apply. A Government of Canada guidance page explains that when severance is paid as salary continuance, the employee pays income tax like regular employment income and that the usual deductions apply, including CPP (or QPP), EI premiums, and RPP contributions (where applicable).

This aligns with standard payroll obligations in CRA’s payroll remittance framework: employers deduct and remit CPP contributions, EI premiums, and income tax on employment income unless a specific exemption applies.

Therefore, the correct option is B (All deductions)—and in Quebec, that “all deductions” concept includes Quebec-specific programs (for example QPP/QPIP where applicable) based on the employee’s province of employment and insurability rules.

Termination notice requirements come from the employment standards legislation that applies to the workplace, which is tied to the jurisdiction where the employee works (province/territory), unless the workplace is federally regulated. The Government of Canada explicitly directs employers and employees to consult the employment standards for the province or territory of work if they are not in a federally regulated industry.

Within a given jurisdiction, the minimum notice (or pay in lieu) is typically based on the employee’s length of continuous employment/service. For example, under the Canada Labour Code (federally regulated workplaces), required notice increases with service (and can be replaced with wages in lieu), showing service length is a core driver of notice entitlements.

That’s why “where they live” is not the deciding factor for notice rules: the governing employment standards are based on the jurisdiction of employment (where the work is performed / the employment is regulated), and the employee’s length of service under that jurisdiction’s rules.

The CRA’s prescribed interest rates are established for specific periods labelled by calendar quarter (for example, “first calendar quarter 2026”), and CRA publishes the rate schedule by quarter.

This prescribed rate is used in multiple tax contexts, including calculating taxable benefits on certain interest-free or low-interest employee/shareholder loans, and it also relates to interest charged/paid by the CRA on overdue amounts and overpayments (with different rates for different situations).

Because CRA’s publication is organized and effective by quarter (e.g., Jan 1–Mar 31; Apr 1–Jun 30; Jul 1–Sep 30; Oct 1–Dec 31), the correct answer is each calendar quarter (option D), not monthly, semi-annual, or annual.

In Saskatchewan (outside Quebec), EI premiums are deducted at the 2026 employee EI premium rate of $1.63 per $100 of insurable earnings (1.63%).

CRA guidance confirms that wages in lieu of termination notice are subject to EI premiums, and to determine statutory deductions you include the wages in lieu with the regular income (if any) for the pay period.

Step 1: Determine total insurable earnings in the final pay (assuming both amounts are insurable and the annual maximum won’t be exceeded):

$12,523.00 + $1,080.00 = $13,603.00.

Step 2: Calculate EI premium:

$13,603.00 × 1.63% = $13,603.00 × 0.0163 = $221.7289, which rounds to $221.73.

So, the EI premium to deduct from Feraz’s pay for this combined payment is $221.73.

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.

In Quebec, employer-paid premiums (contributions) to a group insurance plan, including a private health services plan (which commonly covers items like dental and prescription drugs), are treated as a taxable benefit for the employee for Quebec purposes. Revenu Québec explicitly states that contributions (premiums) an employer pays under a group insurance plan for coverage received by an employee constitute a taxable benefit.

Because the employer is paying the premium directly to the insurer (the employee receives coverage rather than cash), this is treated as a non-cash taxable benefit in payroll classification terms. The payroll impact is that this taxable benefit must be included in the employee’s Quebec taxable income and reported on the RL-1 (and handled according to Quebec source deduction rules).

Outside Quebec, employer-paid health/dental plan premiums are generally not treated the same way for provincial taxable benefit purposes, which is why the correct answer among the options is Quebec.