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Income taxes
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
Income taxes Income taxes
The following is a summary of the major components of the Company’s income tax expense:

(in millions of Canadian dollars)202220212020
Current income tax expense$492 $526 $537 
Deferred income tax expense
Origination and reversal of temporary differences101 259 277 
Effect of tax rate decrease(25)(11)(32)
Effect of hedge of net investment in foreign subsidiaries (Note 7)

59 (3)(18)
Other1 (3)(6)
Total deferred income tax expense136 242 221 
Total income taxes$628 $768 $758 
Income before income tax expense
Canada$2,236 $2,899 $2,518 
Foreign1,909 721 684 
Total income before income tax expense$4,145 $3,620 $3,202 
Income tax expense
Current
Canada$333 $404 $412 
Foreign159 122 125 
Total current income tax expense492 526 537 
Deferred
Canada177 (179)231 
Foreign(41)421 (10)
Total deferred income tax expense136 242 221 
Total income taxes$628 $768 $758 
 
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 carryforwards. The items comprising the deferred income tax assets and liabilities are as follows:

(in millions of Canadian dollars)20222021
Deferred income tax assets
Tax losses and other attributes carried forward(1)
$70 $19 
Liabilities carrying value in excess of tax basis108 124 
Unrealized foreign exchange losses50 — 
Environmental remediation costs22 22 
Other(1)
5 5 
Total deferred income tax assets255 170 
Valuation allowance(4)— 
Total net deferred income tax assets$251 $170 
Deferred income tax liabilities
   Investment in Kansas City Southern (Note 10)
7,526 7,079 
Properties carrying value in excess of tax basis4,149 3,887 
Pensions carrying value in excess of tax basis691 441 
Unrealized foreign exchange gains— 13 
Other82 102 
Total deferred income tax liabilities12,448 11,522 
Total net deferred income tax liabilities$12,197 $11,352 
(1) 2021 comparative figures have been reclassified to conform with current period presentation.

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)202220212020
Statutory federal and provincial income tax rate (Canada)26.12 %26.12 %26.31 %
Expected income tax expense at Canadian enacted statutory tax rates$1,083 $946 $842 
(Decrease) increase in taxes resulting from:
Gains not subject to tax(9)(116)(23)
Canadian tax rate differentials(12)(22)(3)
Foreign tax rate differentials(94)(37)(32)
Effect of tax rate decrease(25)(11)(32)
Deduction for dividends taxed on outside basis(270)— — 
Unrecognized tax benefits(24)(2)(7)
Other(21)10 13 
Income tax expense$628 $768 $758 

In 2022, the Company recorded a deferred tax recovery of $19 million (U.S. $15 million) on the outside basis difference of the change in the equity investment in KCS from December 31, 2021. The outside basis difference is the excess of the carrying amount of the Company’s investment in KCS for financial reporting over the tax basis of this investment. Reversal of this deferred tax liability is expected to be recognized through income tax expense.

In 2022, the Company revalued its deferred income tax balances as a result of a corporate income tax rate decrease in the state of Iowa, resulting in a net recovery of $12 million.
In 2021, the Company recorded a deferred tax liability of $7.2 billion (U.S. $5.6 billion) on the outside basis difference of its investment in KCS. This balance is held in a U.S. functional currency entity and subsequently revalued to $7.5 billion at December 31, 2022 ($7.1 billion at December 31, 2021) due to changes in FX.

In 2021, the Company recorded a deferred tax recovery of $33 million (U.S. $26 million) on the outside basis difference of the change in the equity investment in KCS from initial recognition on December 14, 2021.

In 2020, the Company revalued its deferred income tax balances as a result of a tax filing election for the state of North Dakota resulting in a lower corporate income tax rate and a net recovery of $29 million.

With the exception of the deferred tax liability recorded on the outside basis difference of its investment in KCS, 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.

As at December 31, 2022, the Company had tax effected operating losses carried forward of $22 million (2021 – $15 million), which have been recognized as a deferred tax asset. The losses carried forward will begin to expire in 2034. 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.

As at December 31, 2022, the Company had $2 million (2021 – $2 million) in tax effected capital losses carried forward recognized as a deferred tax asset. The Company has no unrecognized tax benefits from capital losses as at December 31, 2022 and 2021.

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:

(in millions of Canadian dollars)202220212020
Unrecognized tax benefits at January 1$49 $55 $52 
Increase in unrecognized:
Tax benefits related to the current year1 — — 
Tax benefits related to prior years— — 10 
Dispositions:
Gross uncertain tax benefits related to prior years(30)(6)(9)
Settlements with taxing authorities— — 2 
Unrecognized tax benefits at December 31$20 $49 $55 

If these uncertain tax positions were recognized, all of the amount of unrecognized tax positions as at December 31, 2022 would impact the Company’s effective tax rate.

During the fourth quarter of 2019, a tax authority proposed an adjustment for a prior tax year without assessing taxes. Although the Company had commenced action to have the proposal removed, an increase in uncertain tax position was recorded on deferred income tax liability and expense in the amount of $24 million. While the proposed adjustment was withdrawn during 2020, the ultimate resolution of this matter was not previously determinable. During the fourth quarter of 2022, the Company recorded a deferred tax recovery of $24 million to reverse this uncertain tax position as the amount is no longer expected to be realized.

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 2022 was a $5 million expense (2021 – $4 million expense; 2020 – $1 million recovery). The total amount of accrued interest and penalties associated with unrecognized tax benefits as at December 31, 2022 was $18 million (2021 – $13 million; 2020 – $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 2017. The federal and provincial income tax returns filed for 2018 and subsequent years remain subject to examination by the Canadian taxation authorities. The Canadian international audit for 2014 and subsequent years is ongoing. The income tax returns for 2019 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 as at December 31, 2022, with respect to these income tax examinations.