Free National Payroll Institute PF1 Practice Exam with Questions & Answers

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.

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.

For CRA automobile benefit purposes (standby charge on an employer-owned automobile), the “cost” used is the capital cost, which includes more than just the sticker price. CRA guidance states the cost includes the trade-in amount (if applicable), additions, and GST/HST and PST as part of the cost base used in the standby charge calculation.

Option D is the best match because it includes vehicle options/accessories, sales taxes, and additions that add to depreciation value. Importantly, CRA also notes that certain specialized equipment added to meet the requirements of a disabled person or employment (examples include heavy-duty suspension and power winches) is not considered part of the automobile’s cost for standby charge purposes. This directly rules out options A and C, since they treat specialized equipment as part of capital cost. Option B is incorrect because CRA includes sales taxes (GST/HST and PST) in the cost base.

A retiring allowance is treated as a lump-sum payment for payroll withholding purposes. When part of a retiring allowance is transferred directly to an RRSP/RPP, CRA guidance indicates you do not withhold income tax on the transferred amount (up to the employee’s available limit), because it is not paid to the employee in cash.

Step 1: Determine the portion paid directly to the employee (non-eligible portion):

$25,000 − $15,000 transferred to RRSP = $10,000 paid/remaining.

Step 2: Apply CRA lump-sum withholding rates (outside Quebec):

For total lump-sum payments $5,001 to $15,000, the withholding rate is 20%.

Step 3: Calculate tax to withhold on $10,000:

$10,000 × 20% = $2,000.00.

So the correct option is B ($2,000.00).

In Block 6 (Pay period type), Service Canada instructs employers to enter the employee’s actual pay period type—one of the standard types such as weekly, biweekly, semi-monthly, monthly, or 13 pay periods a year.

Service Canada identifies a special rule only for employees “paid solely on commission or on salary plus irregularly paid commission”: in those cases, the employer must use a weekly pay period and average earnings using the weekly averaging formula.

Because this question specifies salary plus regularly paid commission (not irregularly paid commission), the “special situation” rule does not apply. Therefore, you enter the pay period type that matches the employer’s normal payroll cycle for that employee (for example, weekly, biweekly, semi-monthly, monthly, etc.).

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.

Block 11 on the ROE is “Last day for which paid.” Service Canada instructs employers to enter the last day for which the employee received insurable earnings. This date usually coincides with the last day of work, unless the employee continues to receive insurable earnings after the last day worked (for example, paid leave like vacation/sick leave or salary continuance).

In Tanya’s case, she gave notice on April 2, but her resignation is effective April 27. There’s no information indicating paid leave after April 27 or salary continuance. So Block 11 should be April 27 (the last day she worked/received insurable earnings).

The question also mentions the pay period ending April 28—that date belongs in Block 12 (Final pay period ending date), which is the end date of the final pay period that includes the Block 11 date, and is often different from Block 11.

Regular salary, vacation pay, and commissions are generally treated as income from employment because they are amounts paid for services performed during employment. In contrast, what many people call “severance pay” is often classified by the CRA as a retiring allowance—an amount paid when or after an employee retires or loses their job, in recognition of long service or for the loss of employment.

This distinction matters in payroll because a retiring allowance has its own rules for withholding and potential RRSP/RPP transfer eligibility, and it is not treated the same way as normal employment income earned while actively employed. CRA technical guidance also draws lines between amounts that are employment income versus retiring allowance depending on the nature/timing of the payment.

So, among the options listed, severance pay (when it is a retiring allowance) is the one that is not considered income from employment in the way salary/vacation pay/commissions are.

In payroll, deductions are applied in a priority order so employers satisfy mandatory legal obligations first. CRA collection tools such as a Requirement to Pay (RTP) and a Demand on a Third Party (DTP) are legal/garnishment-type deductions. CRA explains that a Requirement to Pay directs a third party (often the employer) to send amounts otherwise payable to the employee to the CRA, and the employer must comply.

Company pension contributions (where participation is required as a condition of employment or under a plan/collective agreement) are generally company-compulsory deductions—important, but they come after statutory and legal deductions. Voluntary insurance coverage is a classic voluntary deduction (the employee chooses it; it is not legally required). Voluntary deductions are normally taken last because they must not interfere with statutory/legal withholding obligations.

So among the options, voluntary insurance coverage is the one that would be withheld last in the order of priority.

The Northern residents deductions (often referred to as the “prescribed zone” deduction on the personal tax return) are not limited to the three territories. While all places in Yukon, Nunavut, and the Northwest Territories are in a prescribed northern zone (Zone A), the rules also designate prescribed northern and intermediate zones in parts of several provinces (for example, parts of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, and others).

The governing framework is in the Income Tax Regulations, which define prescribed zones using geographic descriptions (latitudes/longitudes) covering areas in multiple provinces, as well as the territories.

From a payroll/HR communications perspective, the key is that this deduction is generally claimed by the individual on their income tax return (it does not change the employer’s province-of-employment withholding rules). Employees who believe they qualify should verify their community’s zone status using CRA’s prescribed zone lists before claiming the deduction.