At a stop sign, the white stop line is painted noticeably back from where the cross road actually begins. Why is it set back rather than right at the edge?

Correct answer: C. So that a driver stopped behind it can see approaching cross traffic, and so cross traffic and pedestrians have clearance

Because the setback is what makes the stopped position useful. Book 11 requires the stop line to sit "between 1.25 m and 3 m upstream of the projected nearside edge of the intersecting road" where there is no crosswalk, and gives two reasons for placing it where it is: "at STOP signs where visibility is restricted, the stop line should be located so that the driver of a vehicle properly positioned behind the stop line has an adequate view of approaching cross traffic in both directions", and it "should also be positioned with reference to the clearance needs of cross traffic and pedestrians." So the gap is buying you sightlines and buying turning vehicles and people on foot the room to get past your bumper. Where a crosswalk is marked, the separation between the crosswalk line and the stop line must be 1 metre — the crosswalk gets its own clear space.

Source: MTO Driver's Handbook: Ontario Traffic Manual, Book 11 — Pavement, Hazard and Delineation Markings (March 2000), Section 3.8 — Intersections, stop lines