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Income taxes
9 Months Ended
Sep. 30, 2024
Income Tax Disclosure [Abstract]  
Income taxes Income taxes
During the nine months ended September 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 income tax recovery of $3 million related to the revaluation of deferred income tax balances.

During the three and nine months ended September 30, 2023, legislation was enacted to decrease the Iowa and Arkansas state corporate income tax rates. As a result of these changes, the Company recorded a deferred income tax recovery of $14 million related to the revaluation of deferred income tax balances.

The effective tax rates including discrete items for the three and nine months ended September 30, 2024 were 23.88% and 24.44%, respectively, compared to 24.88% and 166.83%, respectively, for the same periods of 2023.

For the three months ended September 30, 2024, the effective tax rate was 24.24%, excluding the discrete items of amortization of business acquisition fair value adjustments of $90 million, acquisition-related costs incurred by CPKC of $36 million, and adjustments to provisions and settlements of Mexican taxes of $7 million recovery recognized in "Compensation and benefits".

For the three months ended September 30, 2023, the effective tax rate was 24.96%, excluding the discrete items of amortization of business acquisition fair value adjustments of $87 million, acquisition-related costs incurred by CPKC of $24 million, a tax settlement with the Servicio de Administración Tributaria ("SAT”) (Mexican tax authority) in relation to taxation years for which audits have closed and an estimated reserve for potential future audit settlements totaling $15 million, and a deferred income tax recovery of $14 million on state corporate income tax rate changes as mentioned above.

For the nine months ended September 30, 2024, the effective tax rate was 24.75%, excluding the discrete items of amortization of business acquisition fair value adjustments of $264 million, acquisition-related costs incurred by CPKC of $90 million, adjustments to provisions and settlements of Mexican taxes of $3 million expense recognized in "Compensation and benefits", and a deferred income tax recovery of $3 million on the Arkansas state corporate income tax rate change.

For the nine months ended September 30, 2023, the effective tax rate was 24.91%, excluding the discrete items of the reversal 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, amortization of business acquisition fair value adjustments of $162 million, acquisition-related costs incurred by CPKC of $158 million, revaluation of deferred income tax balances on unitary state apportionment changes of $51 million, an outside basis deferred income 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, a tax settlement with the SAT in relation to taxation years for
which audits have closed and an estimated settlement for potential future audit settlements totaling $15 million, and a deferred income tax recovery of $14 million on state corporate income tax rate changes as mentioned above.

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 September 30, 2024, the Company believes that it has recorded sufficient income tax reserves with respect to these income tax examinations.

Kansas City Southern de México, S.A. de C.V. (also known as Canadian Pacific Kansas City Mexico) ("CPKCM") closed audit examinations with the SAT for the tax years 2016-2020 in September 2023. The audit examinations were for corporate income tax and value added tax (“VAT”). The settlement of these audits resulted in a payment of $75 million.

2014 Tax Assessment

CPKCM's 2014 Tax Assessment is currently in litigation before the Federal Collegiate Circuit Courts. For further detail, please see Note 14.