

(in millions of Canadian dollars)	2019			2018			2017
Current income tax expense	$	525		$	381		$	303
Deferred income tax expense
Origination and reversal of temporary differences	316			214			371
Effect of tax rate decrease	(95		)	(21		)	(541		)
Effect of hedge of net investment in foreign subsidiaries	(38		)	64			(42		)
Other	(2		)	(1		)	2
Total deferred income tax expense (recovery)	181			256			(210		)
Total income taxes	$	706		$	637		$	93
Income before income tax expense
Canada	$	2,392		$	1,788		$	1,829
Foreign	754			800			669
Total income before income tax expense	$	3,146		$	2,588		$	2,498
Income tax expense
Current
Canada	$	410		$	336		$	257
Foreign	115			45			46
Total current income tax expense	525			381			303
Deferred
Canada	141			174			256
Foreign	40			82			(466		)
Total deferred income tax expense (recovery)	181			256			(210		)
Total income taxes	$	706		$	637		$	93

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)	2019		2018
Deferred income tax assets
Amount related to tax losses carried forward	$	6	$	11
Liabilities carrying value in excess of tax basis	139		97
Unrealized foreign exchange losses	26		85
Environmental remediation costs	22		23
Other	4		2
Total deferred income tax assets	197		218
Valuation allowance	—		(5		)
Total net deferred income tax assets	197		213
Deferred income tax liabilities
Properties carrying value in excess of tax basis	3,524		3,496
Pensions carrying value in excess of tax basis	83		164
Other	91		71
Total deferred income tax liabilities	3,698		3,731
Total net deferred income tax liabilities	$	3,501	$	3,518

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)	2019			2018			2017
Statutory federal and provincial income tax rate (Canada)	26.77		%	26.86		%	26.56		%
Expected income tax expense at Canadian enacted statutory tax rates	$	842		$	695		$	663
(Decrease) increase in taxes resulting from:
(Gains) losses not subject to tax	(19		)	8			(27		)
Canadian tax rate differentials	—			—			1
Foreign tax rate differentials	(33		)	(55		)	(9		)
Effect of tax rate decrease	(95		)	(21		)	(541		)
Valuation allowance	(5		)	5			—
Unrecognized tax benefits⁽¹⁾	33			—			1
Other⁽¹⁾	(17		)	5			5
Income tax expense	$	706		$	637		$	93

In 2019, the Company revalued its deferred income tax balances as a result of a corporate income tax rate decrease in the province of Alberta, resulting in a net recovery of $88 million.

In 2018, the Company revalued its deferred income tax balances as a result of corporate income 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 was 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 tax rates totaled a net recovery of $541 million.

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.

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.

At December 31, 2019, the Company had tax effected operating losses carried forward of $4 million (2018 – $8 million), which have been recognized as a deferred tax asset. The majority of these losses carried forward will begin to expire in 2031, with the remaining expiring between 2034 and 2036. 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.

At December 31, 2019, the Company had $2 million (2018 – $3 million) in tax effected capital losses carried forward recognized as a deferred tax asset. The Company has no unrecognized tax benefits from capital losses at December 31, 2019 and 2018.



(in millions of Canadian dollars)	2019			2018			2017
Unrecognized tax benefits at January 1	$	13		$	13		$	13
Increase in unrecognized:
Tax benefits related to the current year	9			1			—
Tax benefits related to prior years	34			—			—
Dispositions:
Gross uncertain tax benefits related to prior years	—			(1		)	—
Settlements with taxing authorities	(4		)	—			—
Unrecognized tax benefits at December 31	$	52		$	13		$	13

During the fourth quarter of 2019, a tax authority proposed an adjustment for a prior tax year without assessing taxes. Although the Company has commenced action to have the proposal removed, an increase in uncertain tax position has been recorded on deferred income tax liability and expense in the amount of $24 million. The ultimate resolution of this matter may give rise to further favourable or unfavourable adjustments to deferred tax, the timing and amount of which are not determinable at this time.

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 2019 was a $1 million recovery (2018 – $nil; 2017 – $1 million expense). The total amount of accrued interest and penalties associated with the unrecognized tax benefit at December 31, 2019 was $10 million (2018 – $11 million; 2017 – $11 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 2013. The federal and provincial income tax returns filed for 2014 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 2016 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, 2019 with respect to these income tax examinations.