Free National Payroll Institute PF1 Practice Exam with Questions & Answers | Set: 2

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.

Taxable gross for the period = $1,600.00 + $30.00 = $1,630.00 (a taxable allowance is included in income for tax withholding).

Using CRA T4032-AB (Biweekly, 26 pay periods) with claim code 2:

Federal tax at pay $1,630 falls in the $1,619–$1,635 range → CC2 = $107.35.

Alberta provincial tax at pay $1,630 falls in the $1,628–$1,644 range → CC2 = $46.55.

Subtotal tax from the tables = $107.35 + $46.55 = $153.90.

CRA notes these tax tables build in the tax credits for CPP/EI, so when CPP is not deducted (because annual max already reached), you must increase tax withholding accordingly.

CPP that would have been deducted this pay (using CRA rates/YBE):

Pensionable = $1,630 − ($3,500/26 = $134.62) = $1,495.38; CPP (4.95% + 1.00% = 5.95%) = $88.98.

Add back missing credits: Federal 14% × 88.98 = $12.46; Alberta 8% × 88.98 = $7.12 → total $19.58.

Final total tax = $153.90 + $19.58 = $173.48.

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.

Legislated wages in lieu of notice are treated as pensionable employment earnings for CPP purposes, so they are included with the employee’s final regular pay when calculating CPP deductions (assuming no CPP exemption applies).

Step 1: Determine total pensionable earnings for the week:

$7,760.00 + $875.00 = $8,635.00.

Step 2: Subtract the CPP basic exemption (Year’s Basic Exemption is $3,500 annually). For a weekly payroll, the basic exemption is prorated:

$3,500 ÷ 52 = $67.31.

CPP contributory earnings for the week:

$8,635.00 − $67.31 = $8,567.69.

Step 3: Apply the 2026 CPP employee contribution rate of 5.95% (base CPP). The question states the annual maximum will not be exceeded, so no capping is required in this calculation.

CPP contribution:

$8,567.69 × 5.95% = $509.7777…, rounded to $509.78.

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

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.

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.

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.

The payment type most clearly not subject to all statutory deductions is directors’ fees. CRA guidance on directors’ fees shows they are treated as a special payment with distinct deduction rules, and (depending on the situation) they may not have CPP, EI, and income tax all apply in the same way as normal employment earnings.

By contrast, retroactive adjustments and performance bonuses are treated as taxable remuneration where CRA’s tools (like PDOC) calculate CPP contributions, EI premiums, and income tax on those payments (up to annual maximums).

“Vacation pay when no time was taken” is also treated as a non-periodic payment and is included in CRA payroll deduction formulas as a type of amount on which statutory deductions are calculated (again, subject to annual maximums for CPP/EI).

So, among the options listed, directors’ fees are the one that would not necessarily be subject to all statutory deductions in the standard way.

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.