Income taxes

12 Months Ended

Dec. 31, 2024

Income Tax Disclosure [Abstract]

Income taxes

Income taxes

The following is a summary of the major components of the Company’s income tax expense (recovery):

For the year ended December 31 (in millions of Canadian dollars)	2024		2023		2022
Current income tax expense	$	1,031	$	909	$	492
Deferred income tax expense (recovery)
Reversal of outside basis deferred income tax (Note 10)	—		(7,832)		—
Origination and reversal of temporary differences	65		53		101
Effect of tax rate decrease	(70)		(72)		(25)
Effect of hedge of net investment in foreign subsidiaries and equity-method investees (Note 8)	36		(22)		59
Other	(3)		(12)		1
Total deferred income tax expense (recovery)	28		(7,885)		136
Total income tax expense (recovery)	$	1,059	$	(6,976)	$	628
Income (loss) before income tax expense (recovery)
Canada	2,426		2,359		2,236
Foreign	2,346		(5,412)		1,909
Total income (loss) before income tax expense (recovery)	4,772		(3,053)		4,145
Income tax expense (recovery)
Current
Canada	409		377		333
Foreign	622		532		159
Total current income tax expense	1,031		909		492
Deferred
Canada	206		238		177
Foreign	(178)		(8,123)		(41)
Total deferred income tax expense (recovery)	28		(7,885)		136
Total income tax expense (recovery)	$	1,059	$	(6,976)	$	628

 

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)	2024		2023
Deferred income tax assets
Tax losses and other attributes carried forward	$	298	$	173
Liabilities carrying value in excess of tax basis	300		276
Unrealized foreign exchange losses	57		18
Environmental remediation costs	50		50
Other	10		7
Total deferred income tax assets	715		524
Valuation allowance	(57)		(36)
Total net deferred income tax assets	$	658	$	488
Deferred income tax liabilities
Properties carrying value in excess of tax basis	10,155		9,481
Pensions carrying value in excess of tax basis	1,084		751
Intangibles carrying value in excess of tax basis	824		789
Investments carrying value in excess of tax basis	498		473
Other	71		46
Total deferred income tax liabilities	12,632		11,540
Total net deferred income tax liabilities	$	11,974	$	11,052

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

For the year ended December 31 (in millions of Canadian dollars, except percentage)	2024			2023			2022
Statutory federal and provincial income tax rate (Canada)	26.11		%	26.11		%	26.12		%
Expected income tax expense (recovery) at Canadian enacted statutory tax rates	$	1,246		$	(797)		$	1,083
(Decrease) increase in taxes resulting from:
Reversal of outside basis deferred income tax (Note 10)	—			(7,832)			—
Remeasurement loss of Kansas City Southern	—			1,873			—
(Gains) losses not subject to tax	(10)			10			(9)
Canadian tax rate differentials	(17)			(14)			(12)
Foreign tax rate differentials	(41)			(62)			(94)
Effect of tax rate decrease	(70)			(72)			(25)
Deduction for dividends taxed on outside basis	—			(68)			(270)
Unrecognized tax benefits	3			(10)			(24)
Inflation in Mexico	(33)			(31)			—
Valuation allowance	5			1			—
Other	(24)			26			(21)
Income tax expense (recovery)	$	1,059		$	(6,976)		$	628

In 2024, the Company revalued its deferred income tax balances as a result of decreases in the corporate income tax rates in the states of Louisiana and Arkansas, resulting in a net recovery of $81 million.

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 2023, the Company recorded a deferred income 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, a deferred income tax recovery of $19 million (U.S. $15 million) was 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 income tax recovery of $7,832 million on the derecognition of the deferred income tax liability on the outside basis difference of the investment in KCS upon acquiring control.

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 does not intend to realize this difference by a sale of its interest in foreign investments. It is not practical to calculate the amount of the deferred income 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, 2024, the Company had tax effected operating losses carried forward of $33 million (2023 - $52 million), which have been recognized as a deferred income 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, 2024, the Company had $18 million (2023 - $2 million) in tax effected capital losses carried forward recognized as a deferred income tax asset. The losses carried forward will begin to expire in 2029. The Company expects to fully utilize these tax effected capital losses before their expiry.

As at December 31, 2024, the Company had $6 million (2023 - $4 million) in tax credits carried forward recognized as a deferred income tax asset, which will begin to expire in 2027. 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)	2024		2023		2022
Unrecognized tax benefits at January 1	$	22	$	20	$	49
Increase in unrecognized:
Tax benefits related to the current year	1		2		1
Tax benefits related to prior years	14		10		—
Tax benefits acquired with KCS	—		2		—
Dispositions:
Gross uncertain tax benefits related to prior years	(1)		(6)		(30)
Settlements with taxing authorities	(7)		(6)		—
Unrecognized tax benefits at December 31	$	29	$	22	$	20

If these unrecognized tax benefits were recognized, $24 million of unrecognized tax benefits as at December 31, 2024 would impact the Company’s effective tax rate.

During the fourth quarter of 2022, the Company recorded a deferred income tax recovery of $24 million to reverse an 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 expense (recovery)" in the Company’s Consolidated Statements of Income. The net amount of accrued interest, inflation and penalties in 2024 was a $4 million recovery (2023 - $3 million recovery; 2022 - $5 million expense). The total amount of accrued interest, inflation and penalties associated with unrecognized tax benefits as at December 31, 2024 was $11 million (2023 - $15 million; 2022 - $18 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 2019. The federal and provincial income tax returns filed for 2020 and subsequent years remain subject to examination by the Canadian taxation authorities. The 2019 and subsequent years remain subject to international audit examination by the Canadian taxation authorities. The U.S. income tax returns for 2021 and subsequent years continue to remain subject to examination by the Internal Revenue Service ("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 before the Federal Collegiate Circuit Courts (see Note 25). 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 other Mexican subsidiaries with ongoing audits for the years 2016-2019 and 2021. As at December 31, 2024, the Company believes that it has recorded sufficient income tax reserves with respect to these income tax examinations and open tax years.

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 10) 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 25). The settlement and the estimated impact of potential future audit settlements resulted in an increase of $96 million to "Goodwill" (see Note 10) 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.