Income taxes

6 Months Ended

Jun. 30, 2024

Income Tax Disclosure [Abstract]

Income taxes

Income taxes

During the three months ended June 30, 2024, legislation was enacted to decrease the Arkansas state corporate income tax rate. As a result of this change, the Company recorded a deferred tax recovery of $3 million related to the revaluation of deferred income tax balances.

The effective tax rates including discrete items for the three and six months ended June 30, 2024 were 24.40% and 24.72%, respectively, compared to 120.88% and 139.47%, respectively, for the same periods of 2023.

For the three months ended June 30, 2024, the effective tax rate was 25.00%, excluding the discrete items of amortization of business acquisition fair value adjustments of $88 million, acquisition-related costs incurred by CPKC of $28 million, and a deferred tax recovery of $3 million on the Arkansas state corporate income tax rate change.

For the three months ended June 30, 2023, the effective tax rate was 25.18%, excluding the discrete items of the derecognition of the deferred income tax liability on the outside basis difference of the investment in KCS of $7,832 million upon acquiring control of KCS, remeasurement loss of KCS of $7,175 million, acquisition-related costs incurred by CPKC of $119 million, amortization of business acquisition fair value adjustments of $75 million, revaluation of deferred income tax balances on unitary state apportionment changes of $51 million, and the equity earnings of KCS of $26 million.

For the six months ended June 30, 2024, the effective tax rate was 25.00%, excluding the discrete items of amortization of business acquisition fair value adjustments of $174 million, acquisition-related costs incurred by CPKC of $54 million, adjustments to provisions and settlements of Mexican taxes of $10 million recognized in "Compensation and benefits", and a deferred tax recovery of $3 million on the Arkansas state corporate income tax rate change.

For the six months ended June 30, 2023, the effective tax rate was 24.88%, excluding the discrete items of the derecognition of the deferred income tax liability on the outside basis difference of the investment in KCS of $7,832 million upon acquiring control of KCS, remeasurement loss of KCS of $7,175 million, the equity earnings of KCS of $230 million, acquisition-related costs incurred by CPKC of $134 million, amortization of business acquisition fair value adjustments of $75 million, revaluation of deferred income tax balances on unitary state apportionment changes of $51 million, and an outside basis deferred tax recovery of $23 million arising from the difference between the carrying amount of CPKC's investment in KCS for financial reporting and the underlying tax basis of this investment.

See Note 8 for information regarding the KCS acquisition and Note 9 for information regarding the investment in KCS.

Mexican Tax Audits

There are certain Mexican subsidiaries with ongoing audits for the years 2016-2019 and 2021. As at June 30, 2024, the Company believes that it has recorded sufficient income tax reserves with respect to these income tax examinations.

2014 Tax Assessment

The Kansas City Southern de México, S.A. de C.V. (also known as Canadian Pacific Kansas City Mexico) ("CPKCM") 2014 Tax Assessment is currently in litigation. Following an Administrative Court decision in April 2024 that upheld the Servicio de Administración Tributaria's ("SAT”) (Mexican tax authority) dismissal of CPKCM's administrative appeal and the 2014 Tax Assessment, CPKCM challenged this decision by filing an amparo petition on June 21, 2024 (see Note 14).