PF1 Payroll Fundamentals 1Exam Question and Answers

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).

Step 1 — Gross Taxable Earnings (GTE)

Salary per pay: 49,500 ÷ 24 = $2,062.50

Taxable car allowance: $50.00

Group term life taxable benefit:

Coverage = 2 × 49,500 = 99,000

Monthly premium = (99,000 ÷ 1,000) × 0.62 = 99 × 0.62 = 61.38

Semi-monthly benefit = 61.38 ÷ 2 = $30.69

GTE = $2,143.19

Step 2 — Pensionable Earnings (PE)

PE = $2,112.50 (2,062.50 + 50.00)

Step 3 — Insurable Earnings (IE)

IE = $2,112.50

Step 4 — Net Taxable Income (CRA) (NTI)

RPP = 5% × 2,062.50 = $103.13

Union dues = 2% × 2,062.50 = $41.25

NTI (CRA) = 2,143.19 − 103.13 − 41.25 = $1,998.81

Step 5 — Net Taxable Income (RQ)

$0.00

Step 6 — CPP (base CPP)

Period exemption = 3,500 ÷ 24 = $145.83

Contributory = 2,112.50 − 145.83 = $1,966.67

CPP = 1,966.67 × 5.95% = $117.02

CPP = $117.02

Step 6B — 2nd CPP (CPP2)

CPP2 = $0.00

Step 7 — EI premium

EI = 2,112.50 × 1.63% = $34.43

EI = $34.43

Step 8 — QPIP

$0.00

Step 9 — Federal income tax (CC1, semi-monthly)

$156.10

Step 10 — Alberta income tax (CC1, semi-monthly)

$73.20

Step 11 — Total deductions

Statutory: 117.02 + 34.43 + 156.10 + 73.20 = $380.75

Other: RPP 103.13 + Union 41.25 + United Way 20.00 + Social club 5.00 = $169.38

Total deductions = $550.13

Step 12 — Net pay

Cash pay (salary + car allowance) = 2,062.50 + 50.00 = $2,112.50

Net pay = 2,112.50 − 550.13 = $1,562.37

An expense reimbursement is a repayment to an employee for business costs they already paid personally (for example, meals, mileage, supplies), typically supported by receipts or an expense report. CRA’s guidance explains that a reimbursement is a payment made to repay amounts the employee spent while conducting the employer’s business, and that a reasonable reimbursement is generally not included in the employee’s income.

That’s why reimbursements are generally not part of “earnings” for payroll calculations—they are not compensation for work performed; they are repayment of a business expense. This differs from an allowance, which is usually a fixed amount paid without requiring receipts; allowances are often taxable unless a specific CRA exception applies.

So the correct term for “dollar amounts paid to cover job expenses incurred, but not considered earnings” is expense reimbursements (option D). Payroll best practice is to ensure reimbursements are properly documented and reasonable to support non-taxable treatment.

A fixed amount paid to an employee for meals each pay period is typically a meal allowance. CRA guidance distinguishes an allowance from a reimbursement: an allowance is usually a set amount paid without the employee having to submit receipts for actual costs, while a reimbursement repays specific expenses and is generally supported by receipts or an expense claim.

Because Charlene “receives $50.00 each pay for her meals,” it is a flat amount, which aligns with an allowance rather than a reimbursement. Whether the allowance is taxable or non-taxable depends on the facts (for example, whether it is reasonable and paid under conditions CRA recognizes as non-taxable for certain travel situations). If it’s not a reasonable travel allowance under CRA’s exceptions, it is generally a taxable allowance and must be included in income with appropriate deductions.

So the correct classification is A (an allowance).

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.

In ROE administration, the key concept is whether the employment relationship is still “active” (that is, whether there is an ongoing expectation the employee will work again). Service Canada’s ROE guidance ties ROE issuance to an interruption of earnings and specifically identifies situations where an employee is no longer on the employer’s active employment list (for example, no expectation of future work) as a trigger for issuing an ROE.

Options A and B describe circumstances that can still align with an ongoing employment relationship. For example, employees may remain eligible for certain benefits after a last day worked, and a right to recall means the employer may still consider the employee attached to the workplace (often still “active” depending on the arrangement). In contrast, when there is no expectation of work to be performed, the relationship is effectively ended for ROE purposes, and the employer generally proceeds with separation reporting and ROE completion based on the interruption of earnings rules.

The CRA form used to adjust payroll income tax withholdings at source for employees who earn commission income and have commission expenses is Form TD1X – Statement of Commission Income and Expenses for Payroll Tax Deductions. The CRA explains that an employee completes TD1X if they receive commission income (or salary plus commission) and want the employer to adjust tax deductions to take commission expenses into account.

This is different from:

TD1, which is the Personal Tax Credits Return used to claim basic/personal credits and determine standard withholding (not commission-expense adjustments).

T777, which is used to claim employment expenses on the employee’s personal tax return (not to reduce payroll withholding at source).

TP-1015.R.13.1-V, which is a Quebec form used to request a reduction of Quebec income tax withholding in specific situations (not the CRA commission-expense at-source form).

Operationally, payroll should keep the TD1X on file and apply it to income tax withholding calculations until the employee updates or replaces it.

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.

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.

Commission employees have a specific ROE rule. Service Canada’s ROE Guide explains that for employees whose earnings consist mainly of commissions, an interruption of earnings occurs only when the employment contract is terminated—unless the employee stops working due to specified EI-related reasons such as illness/injury/quarantine, maternity/pregnancy, parental leave, or compassionate care/family caregiver leaves.

This means the usual 7-day rule (7 consecutive days with no work and no insurable earnings) generally does not trigger an interruption of earnings for mainly-commission employees as long as the contract continues. In other words, if the employee stops working for reasons like vacation or a leave of absence but remains under contract, Service Canada indicates there is no interruption of earnings and therefore no ROE is issued just because of time without commissions/work.

So the correct choice is when the employment relationship/contract is terminated (option C).

A hiring authorization package/checklist typically ensures the organization collects the documents needed to onboard the employee and set them up correctly in payroll and HR systems. This often includes items like an offer letter, signed policies, banking details for direct deposit, emergency contacts, and required HR/legal acknowledgements. A confidentiality agreement is a common onboarding document because it protects the employer’s confidential information and can be required regardless of payroll deductions.

The other options are not good examples of “required information” for all new hires. Employees do not give “consent” for statutory deductions—deductions like CPP, EI, and income tax withholding are required by law and employers must withhold them when applicable. A “clearance certificate” is not a standard universal onboarding requirement for payroll in Canada. A T1213 is only completed in special situations where an employee requests CRA authorization to reduce tax withheld at source; it is not something most new hires must provide.

“Net taxable income” for payroll withholding purposes is the amount of income on which income tax is calculated for the pay period. It generally starts with the employee’s gross taxable earnings for the period (regular wages plus any taxable benefits/allowances that must be included in income), then subtracts only those deductions that are deductible for tax at source (for example, certain registered pension plan contributions, union dues, etc., if applicable). A cash taxable benefit is treated like additional remuneration and is included in taxable income. (canada.ca)

Here, Anthony’s weekly taxable earnings are:

$750.00 wages + $25.00 cash taxable benefit = $775.00.

Being exempt from CPP contributions affects whether CPP is deducted, but CPP is not a “net taxable income” subtraction in this question (and in any case, no CPP is being deducted). The question also does not mention any other tax-deductible payroll deductions (like RPP contributions), so there is nothing to subtract from taxable earnings.

Therefore, Anthony’s net taxable income for the week is $775.00.

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.

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.

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).

Bonuses and incentives are treated as taxable remuneration, so they are generally subject to the same core statutory deductions as regular earnings: CPP/QPP, EI, and income tax (and in Quebec, QPIP also applies when the remuneration is subject to EI). The CRA specifically notes that you must deduct EI premiums from bonuses/retroactive pay (up to the annual maximum), and the CRA’s guidance for bonuses/irregular amounts uses tools (PDOC/formulas) that calculate CPP contributions, EI premiums, and income tax on these payments.

In Quebec payroll, remuneration that is subject to EI premiums is generally also subject to QPIP premiums, so bonuses/incentives that are EI-insurable are typically QPIP-insurable as well.

In the Northwest Territories and Nunavut, there is also a statutory territorial payroll tax that employers must withhold/remit where applicable, and the NWT guidance explicitly lists bonuses as part of employment income subject to payroll tax.

The CRA defines a retiring allowance (also called severance pay) as an amount paid to an employee when or after they retire or lose their job, in recognition of long service or for the loss of office or employment. This matches option A.

The other options are specifically not retiring allowances under CRA guidance. The CRA states a retiring allowance does not include salary, wages, bonuses, or overtime, which rules out bonus or incentive pay and accumulated overtime. The CRA also states it does not include payments for accumulated vacation leave not taken before retirement, which rules out vacation pay.

This classification matters in payroll because retiring allowances have distinct rules: for example, they are not subject to CPP or EI deductions, and part of a retiring allowance may be eligible for direct transfer to an RRSP/RPP under special rules (based on pre-1996 service).

Piecework (also called piece-rate pay) is a pay method where an employee’s earnings are determined by output—they are paid a set amount per unit produced or completed, rather than by hours worked or a fixed salary. This aligns directly with option C. A time-based hourly/daily wage (option A) is a different earnings method, and a fixed pay-per-period arrangement (option B) describes salary. Therefore, “all of the above” is incorrect because these are three distinct compensation structures.

In payroll calculations, piecework earnings are typically calculated as: piece rate × number of units produced in the pay period. Employers still have to ensure compliance with employment standards, such as minimum wage and overtime rules, even where piecework is used. A Canadian payroll educational reference defines piecework as payment for each unit produced “regardless of the amount of time taken.”