When a site content type with a custom template in added to a library and set as default, once the item is created in the list the workflow creates a document in a document library using the Create List Item action. All configured properties are properly copied over but the custom template applied to the content type was not used. Why is the workflow not using the template from the content type?

In O365 the Create List Item action doesn't use custom templates even if that is the default template for the content type.  With Create List Item being a SharePoint Designer 2013 action, this is a limitation of the Workflow Manager.