Income Taxes

12 Months Ended

Dec. 31, 2017

Income taxes

The following is a summary of the major components of the Company’s income tax expense:



(in millions of Canadian dollars)	2017			2016			2015
Current income tax expense	$	303		$	233		$	373
Deferred income tax expense
Origination and reversal of temporary differences	371			336			105
Effect of tax rate (decrease) increase	(541		)	—			23
Effect of hedge of net investment in foreign subsidiaries	(42		)	(20		)	100
Other	2			4			6
Total deferred income tax (recovery) expense	(210		)	320			234
Total income taxes	$	93		$	553		$	607
Income before income tax expense
Canada	$	1,829		$	1,513		$	1,099
Foreign	669			639			860
Total income before income tax expense	$	2,498		$	2,152		$	1,959
Income tax expense
Current
Canada	$	257		$	165		$	173
Foreign	46			68			200
Total current income tax expense	303			233			373
Deferred
Canada	256			207			163
Foreign	(466		)	113			71
Total deferred income tax (recovery) expense	(210		)	320			234
Total income taxes	$	93		$	553		$	607

The provision for deferred income taxes arises from temporary differences in the carrying values of assets and liabilities for financial statement and income tax purposes and the effect of loss carry forwards. The items comprising the deferred income tax assets and liabilities are as follows:



(in millions of Canadian dollars)	2017		2016
Deferred income tax assets
Amount related to tax losses carried forward	$	12	$	18
Liabilities carrying value in excess of tax basis	88		149
Environmental remediation costs	16		30
Other	11		58
Total deferred income tax assets	127		255
Deferred income tax liabilities
Properties carrying value in excess of tax basis	3,181		3,796
Pensions carrying value in excess of tax basis⁽¹⁾	226		—
Other	41		30
Total deferred income tax liabilities	3,448		3,826
Total net deferred income tax liabilities	$	3,321	$	3,571

⁽¹⁾Balance previously included as part of "Liabilities carrying value in excess of tax basis" as a component of deferred income tax assets.

The Company’s consolidated effective income tax rate differs from the expected Canadian statutory tax rates. Expected income tax expense at statutory rates is reconciled to income tax expense as follows:



(in millions of Canadian dollars, except percentage)	2017			2016			2015
Statutory federal and provincial income tax rate (Canada)	26.56		%	26.65		%	26.47		%
Expected income tax expense at Canadian enacted statutory tax rates	$	663		$	573		$	519
Increase (decrease) in taxes resulting from:
(Gains) losses not subject to tax	(27		)	(23		)	28
Canadian tax rate differentials	1			—			1
Foreign tax rate differentials	(9		)	—			39
Effect of tax rate (decrease) increase	(541		)	—			23
Other	6			3			(3		)
Income tax expense	$	93		$	553		$	607

The Company has no unrecognized tax benefits from capital losses at December 31, 2017 and 2016.

On December 22, 2017, the U.S. enacted the “Tax Cuts and Jobs Act” which has been commonly referred to as U.S. tax reform. A significant change under this reform is the reduction of U.S. federal statutory corporate income tax rate from 35% to 21% beginning in 2018. As a result of this and other tax rate increases in the province of British Columbia and the state of Illinois, the Company revalued its deferred income tax balances accordingly. For the full year 2017, revaluations of deferred tax balances associated with changes in rates total a net recovery of $541 million (2016 – $nil).

These recoveries are estimated based on the Company's analysis of the Tax Cuts and Jobs Act. These estimates may be impacted as U.S. authorities issue additional regulations and interpretations in the future.

The Company has not provided a deferred liability for the income taxes, if any, which might become payable on any temporary difference associated with its foreign investments because the Company intends to indefinitely reinvest in its foreign investments and has no intention to realize this difference by a sale of its interest in foreign investments. It is not practical to calculate the amount of the deferred tax liability.

At December 31, 2017, the Company had income tax operating losses carried forward of $11 million, which have been recognized as a deferred tax asset. Certain of these losses carried forward will begin to expire in 2027, with the majority expiring between 2029 and 2035. The Company did not have any minimum tax credits or investment tax credits carried forward.

It is more likely than not that the Company will realize the majority of its deferred income tax assets from the generation of future taxable income, as the payments for provisions, reserves and accruals are made and losses and tax credits carried forward are utilized.

The following table provides a reconciliation of uncertain tax positions in relation to unrecognized tax benefits for Canada and the U.S. for the year ended December 31, 2017:



(in millions of Canadian dollars)	2017		2016			2015
Unrecognized tax benefits at January 1	$	13	$	15		$	17
Increase in unrecognized:
Tax benefits related to the current year	—		—			4
Dispositions:
Gross uncertain tax benefits related to prior years	—		(2		)	(6		)
Unrecognized tax benefits at December 31	$	13	$	13		$	15

If these uncertain tax positions were recognized, all of the amount of unrecognized tax positions as at December 31, 2017 would impact the Company’s effective tax rate.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense in the Company’s Consolidated Statements of Income. The total amount of accrued interest and penalties in 2017 was $1 million (2016 – $1 million; 2015 – $4 million). The total amount of accrued interest and penalties associated with the unrecognized tax benefit at December 31, 2017 was $11 million (2016 – $10 million; 2015 – $9 million).

The Company and its subsidiaries are subject to either Canadian federal and provincial income tax, U.S. federal, state and local income tax, or the relevant income tax in other international jurisdictions. The Company has substantially concluded all Canadian federal and provincial income tax matters for the years through 2012. The federal and provincial income tax returns filed for 2013

and subsequent years remain subject to examination by the Canadian taxation authorities. The Internal Revenue Service ("IRS") of the United States has completed their examinations and issued notices of deficiency for the tax years 2012 and 2013. The Company disagrees with many of their proposed adjustments, and is at the IRS Appeals for those years. The income tax returns for 2014 and subsequent years continue to remain subject to examination by the IRS. Additionally, various U.S. state tax authorities are examining the Company's state income tax returns for the years 2011 through 2015. The Company believes that it has recorded sufficient income tax reserves at December 31, 2017 with respect to these income tax examinations.

The Company does not anticipate any material changes to the unrecognized tax benefits previously disclosed within the next twelve months as at December 31, 2017.