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Income taxes
 12 Months Ended
Dec. 31, 2023
Income Tax Disclosure [Abstract]  
Income taxes Income taxes
The following is a summary of the major components of the Company’s income tax (recovery) expense:

For the year ended December 31 (in millions of Canadian dollars)202320222021
Current income tax expense$909 $492 $526 
Deferred income tax (recovery) expense
Reversal of outside basis deferred tax (Note 11)(7,832)— — 
Origination and reversal of temporary differences53 101 259 
Effect of tax rate decrease(72)(25)(11)
   Effect of hedge of net investment in foreign subsidiaries and equity-method investees (Note 8)
(22)59 (3)
Other(12)1 (3)
Total deferred income tax (recovery) expense (7,885)136 242 
Total income tax (recovery) expense$(6,976)$628 $768 
(Loss) income before income tax (recovery) expense
Canada2,359 2,236 2,899 
Foreign(5,412)1,909 721 
Total (loss) income before income tax (recovery) expense (3,053)4,145 3,620 
Income tax (recovery) expense
Current
Canada377 333 404 
Foreign532 159 122 
Total current income tax expense909 492 526 
Deferred
Canada238 177 (179)
Foreign(8,123)(41)421 
Total deferred income tax (recovery) expense (7,885)136 242 
Total income tax (recovery) expense$(6,976)$628 $768 
 
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:

As at December 31 (in millions of Canadian dollars)20232022
Deferred income tax assets
Tax losses and other attributes carried forward$173 $70 
Liabilities carrying value in excess of tax basis276 108 
Unrealized foreign exchange losses18 50 
Environmental remediation costs50 22 
Other7 5 
Total deferred income tax assets524 255 
Valuation allowance(36)(4)
Total net deferred income tax assets$488 $251 
Deferred income tax liabilities
   Investment in Kansas City Southern (Note 12)
— 7,526 
Properties carrying value in excess of tax basis9,481 4,149 
Pensions carrying value in excess of tax basis751 691 
Intangibles carrying value in excess of tax basis789 — 
Investments carrying value in excess of tax basis(1)
473 38 
Other(1)
46 44 
Total deferred income tax liabilities11,540 12,448 
Total net deferred income tax liabilities$11,052 $12,197 
(1) 2022 comparative figures have been reclassified to conform to the current year's presentation.

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

For the year ended December 31 (in millions of Canadian dollars, except percentage)202320222021
Statutory federal and provincial income tax rate (Canada)26.11 %26.12 %26.12 %
Expected income tax (recovery) expense at Canadian enacted statutory tax rates$(797)$1,083 $946 
(Decrease) increase in taxes resulting from:
Reversal of outside basis deferred tax (Note 11)(7,832)— — 
   Remeasurement loss of Kansas City Southern
1,873 — — 
Losses (gains) not subject to tax10 (9)(116)
Canadian tax rate differentials(14)(12)(22)
Foreign tax rate differentials(62)(94)(37)
Effect of tax rate decrease(72)(25)(11)
Deduction for dividends taxed on outside basis(68)(270)— 
Unrecognized tax benefits(10)(24)(2)
Inflation in Mexico(31)— — 
Valuation allowance1 — — 
Other26 (21)10 
Income tax (recovery) expense $(6,976)$628 $768 
In 2023, the Company recorded a deferred tax recovery of $23 million (U.S. $17 million) on the outside basis difference of the change in the equity investment in KCS for the period January 1, 2023 to April 13, 2023, prior to acquiring control of KCS. In 2022 and 2021, deferred tax recoveries of $19 million (U.S. $15 million) and $33 million (U.S. $26 million), respectively, were recorded on the outside basis difference of the change in the equity investment in KCS. 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.

In 2023, the Company recorded a deferred tax recovery of $7,832 million on the derecognition of the deferred tax liability on the outside basis difference of the investment in KCS upon acquiring control.

In 2023, the Company revalued its deferred income tax balances as a result of decreases in the corporate income tax rates in the states of Iowa and Arkansas, resulting in a net recovery of $13 million. 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 $7,178 million (U.S. $5,607 million) on the outside basis difference of its investment in KCS. This balance was held in a U.S. functional currency entity and subsequently revalued to $7,526 million at December 31, 2022 ($7,079 million at December 31, 2021) due to changes in FX. In 2023, upon acquisition of control in KCS, the entire outside basis deferred tax liability was reversed through "income tax (recovery) expense" as mentioned above.

The Company has not provided a deferred liability for the income taxes 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, 2023, the Company had tax effected operating losses carried forward of $52 million (2022 – $22 million), which have been recognized as a deferred tax asset. The losses carried forward will begin to expire in 2026. The Company expects to fully utilize these tax effected operating losses before their expiry.

As at December 31, 2023, the Company had $2 million (2022 – $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, 2023 and 2022.

As at December 31, 2023, the Company had $4 million in tax effected track maintenance credits carried forward recognized as a deferred tax asset, which will begin to expire in 2028. The Company did not have any minimum tax credits or investment tax credits carried forward.

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

(in millions of Canadian dollars)202320222021
Unrecognized tax benefits at January 1$20 $49 $55 
Increase in unrecognized:
Tax benefits related to the current year2 1 — 
Tax benefits related to prior years10 — — 
Tax benefits acquired with KCS2 — — 
Dispositions:
Gross uncertain tax benefits related to prior years(6)(30)(6)
Settlements with taxing authorities(6)— — 
Unrecognized tax benefits at December 31$22 $20 $49 

If these unrecognized tax benefits were recognized, $17 million of unrecognized tax benefits as at December 31, 2023 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 to 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 determinable until
2022. 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 was no longer expected to be realized.

The Company recognizes accrued interest, inflation and penalties related to unrecognized tax benefits as a component of "Income tax (recovery) expense" in the Company’s Consolidated Statements of Income. The net amount of accrued interest, inflation and penalties in 2023 was a $3 million recovery (2022 – $5 million expense; 2021 – $4 million expense). The total amount of accrued interest, inflation and penalties associated with unrecognized tax benefits as at December 31, 2023 was $15 million (2022 – $18 million; 2021 – $13 million).

The Company and its subsidiaries are subject to either Canadian federal and provincial income tax, U.S. federal, state and local income tax, Mexican 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 2018. The federal and provincial income tax returns filed for 2019 and subsequent years remain subject to examination by the Canadian taxation authorities. The Canadian international audit for 2017 and subsequent years is ongoing. The income tax returns for 2020 and subsequent years continue to remain subject to examination by the IRS and U.S. state tax jurisdictions. Kansas City Southern de México, S.A. de C.V. (also known as Canadian Pacific Kansas City Mexico) ("CPKCM") has closed audit examinations for Mexican income tax returns for the years through 2020, except for the 2014 year which is currently in litigation (see Note 26). The CPKCM Mexican income tax returns filed for 2021 and subsequent years remain subject to examination by the Servicio de Administración Tributaria ("SAT”) (Mexican tax authority). There are certain Mexican subsidiaries with ongoing audits for the years 2016-2018 and 2021. As at December 31, 2023, the Company believes that it has recorded sufficient income tax reserves with respect to these income tax examinations and open tax years.

In December 2021, the Organization for Economic Co-operation and Development ("OECD") published model rules for a new global minimum tax framework ("Pillar Two"), and various governments around the world have issued, or are in the process of issuing, legislation regarding Pillar Two. The Company is in the process of assessing the full impact of this but does not expect it to have a material impact on the Company's future financial results.

Mexican tax audits
CPKCM closed audit examinations with the SAT for the tax years 2016-2020 in September 2023 and the tax years 2009-2010, 2013 and 2015 in November 2023. The audit examinations were for corporate income tax and value added tax (“VAT”). The settlement of these audits resulted in payments of $135 million and a $16 million reduction to the April 14, 2023 refundable VAT balance, which was classified within "Accounts receivable, net". The settlements primarily resulted in an increase of $90 million to "Goodwill" (see Note 11) and a current income tax expense to "Income tax (recovery) expense" of $13 million. In addition, a current income tax expense of $3 million for the year ended December 31, 2023 was recognized to reserve for potential future audit settlements. As a result, as at December 31, 2023, the estimated impact of potential future audit settlements for tax years after 2020 that were substantially reserved included a reduction to the April 14, 2023 refundable VAT balance of $9 million and an income tax reserve of $3 million, which was classified within "Accounts payable and accrued liabilities".

Mexican value added tax
As discussed above in Mexican tax audits, CPKCM closed audit examinations for Mexican VAT returns for the years through 2020, except for the 2014 year which is currently in litigation (see Note 26). The settlement and the estimated impact of potential future audit settlements resulted in an increase of $96 million to "Goodwill" (see Note 11) and a $25 million reduction to the April 14, 2023 refundable VAT balance. As of December 31, 2023 and April 14, 2023, the CPKCM refundable VAT balance was $nil and $55 million, respectively. Except for the 2014 year in litigation, there are no VAT disputes with the SAT as of December 31, 2023.