Income Taxes

12 Months Ended

Dec. 31, 2018

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



(in millions of Canadian dollars)	2018			2017			2016
Current income tax expense	$	381		$	303		$	233
Deferred income tax expense
Origination and reversal of temporary differences	214			371			336
Effect of tax rate decrease	(21		)	(541		)	—
Effect of hedge of net investment in foreign subsidiaries	64			(42		)	(20		)
Other	(1		)	2			4
Total deferred income tax expense (recovery)	256			(210		)	320
Total income taxes	$	637		$	93		$	553
Income before income tax expense
Canada	$	1,788		$	1,829		$	1,513
Foreign	800			669			639
Total income before income tax expense	$	2,588		$	2,498		$	2,152
Income tax expense
Current
Canada	$	336		$	257		$	165
Foreign	45			46			68
Total current income tax expense	381			303			233
Deferred
Canada	174			256			207
Foreign	82			(466		)	113
Total deferred income tax expense (recovery)	256			(210		)	320
Total income taxes	$	637		$	93		$	553

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)	2018			2017
Deferred income tax assets
Amount related to tax losses carried forward	$	11		$	12
Liabilities carrying value in excess of tax basis	97			77
Unrealized foreign exchange losses	85			11
Environmental remediation costs	23			16
Other	2			11
Total deferred income tax assets	218			127
Less: Valuation allowance	(5		)	—
Total net deferred income tax assets	213			127
Deferred income tax liabilities
Properties carrying value in excess of tax basis	3,496			3,181
Pensions carrying value in excess of tax basis	164			226
Other	71			41
Total deferred income tax liabilities	3,731			3,448
Total net deferred income tax liabilities	$	3,518		$	3,321

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)	2018			2017			2016
Statutory federal and provincial income tax rate (Canada)	26.86		%	26.56		%	26.65		%
Expected income tax expense at Canadian enacted statutory tax rates	$	695		$	663		$	573
Increase (decrease) in taxes resulting from:
Losses (gains) not subject to tax	8			(27		)	(23		)
Canadian tax rate differentials	—			1			—
Foreign tax rate differentials	(55		)	(9		)	—
Effect of tax rate decrease	(21		)	(541		)	—
Valuation allowance	5			—			—
Other	5			6			3
Income tax expense	$	637		$	93		$	553

The Company has no unrecognized tax benefits from capital losses at December 31, 2018 and 2017.

In 2018, the Company revalued its deferred income tax balances as a result of tax rate decreases in the states of Iowa and Missouri, resulting in a net recovery of $21 million.

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 the 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.

As at December 31, 2018, the Company has completed the measurement of certain income tax effects of the Tax Cuts and Jobs Act in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 118 ("SAB 118'). There was no significant change identified from the provisional amount previously reported in the prior year.

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, 2018, the Company had tax effected operating losses carried forward of $8 million, which have been recognized as a deferred tax asset. The majority of these losses carried forward will begin to expire in 2027, with the remaining expiring between 2031 and 2035. The Company expects to fully utilize these tax effected operating losses before their expiry. 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, 2018:



(in millions of Canadian dollars)	2018			2017		2016
Unrecognized tax benefits at January 1	$	13		$	13	$	15
Increase in unrecognized:
Tax benefits related to the current year	1			—		—
Dispositions:
Gross uncertain tax benefits related to prior years	(1		)	—		(2		)
Unrecognized tax benefits at December 31	$	13		$	13	$	13

If these uncertain tax positions were recognized, all of the amount of unrecognized tax positions as at December 31, 2018 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 net amount of accrued interest and penalties in 2018 was $nil (2017 – $1 million; 2016 – $1 million). The total amount of accrued interest and penalties associated with the unrecognized tax benefit at December 31, 2018 was $11 million (2017 – $11 million; 2016 – $10 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") audit for 2012 and 2013 has been settled. The income tax returns for 2014 and subsequent years continue to remain subject to examination by the IRS and U.S. state tax jurisdictions. The Company believes that it has recorded sufficient income tax reserves at December 31, 2018 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, 2018.