CANADIAN PACIFIC KANSAS CITY LTD/CNCP
CANADIAN PACIFIC KANSAS CITY LTD/CN Income Taxes Disclosure
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) | 2025 | 2024 | 2023 | ||||||||
| Current income tax expense | $ | 1,174 | $ | 1,031 | $ | 909 | |||||
| Deferred income tax expense (recovery) | |||||||||||
Reversal of outside basis deferred income tax (Note 11) | — | — | (7,832) | ||||||||
| Origination and reversal of temporary differences | 214 | 65 | 53 | ||||||||
| Effect of tax rate decrease | (7) | (70) | (72) | ||||||||
Effect of hedge of net investment in foreign subsidiaries and equity-method investees (Note 9) | (31) | 36 | (22) | ||||||||
| Other | (5) | (3) | (12) | ||||||||
| Total deferred income tax expense (recovery) | 171 | 28 | (7,885) | ||||||||
| Total income tax expense (recovery) | $ | 1,345 | $ | 1,059 | $ | (6,976) | |||||
| Income (loss) before income tax expense (recovery) | |||||||||||
| Canada | $ | 2,495 | $ | 2,426 | $ | 2,359 | |||||
| Foreign | 2,987 | 2,346 | (5,412) | ||||||||
| Total income (loss) before income tax expense (recovery) | 5,482 | 4,772 | (3,053) | ||||||||
| Income tax expense (recovery) | |||||||||||
| Current | |||||||||||
| Canada | 369 | 409 | 377 | ||||||||
| Foreign | 805 | 622 | 532 | ||||||||
| Total current income tax expense | 1,174 | 1,031 | 909 | ||||||||
| Deferred | |||||||||||
| Canada | 286 | 206 | 238 | ||||||||
| Foreign | (115) | (178) | (8,123) | ||||||||
| Total deferred income tax expense (recovery) | 171 | 28 | (7,885) | ||||||||
| Total income tax expense (recovery) | 1,345 | 1,059 | (6,976) | ||||||||
Canada - Federal(1) | 379 | — | — | ||||||||
Canada - Provincial(1) | 276 | — | — | ||||||||
| Foreign | 690 | — | — | ||||||||
| Total income tax expense (recovery) | $ | 1,345 | $ | 1,059 | $ | (6,976) | |||||
(1) Disaggregation of domestic federal and provincial income tax expense in accordance with the prospective adoption of Accounting Standards Update ("ASU") 2023-09 Income Taxes (Topic 740): Improvements to Income Tax Disclosures effective January 1, 2025.
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) | 2025 | 2024 | ||||||
| Deferred income tax assets | ||||||||
| Tax losses and other attributes carried forward | $ | 290 | $ | 298 | ||||
| Liabilities carrying value in excess of tax basis | 259 | 300 | ||||||
| Environmental remediation costs | 47 | 50 | ||||||
| Unrealized foreign exchange losses | 26 | 57 | ||||||
| Other | 17 | 10 | ||||||
| Total deferred income tax assets | 639 | 715 | ||||||
| Less: Valuation allowance | (38) | (57) | ||||||
| Total net deferred income tax assets | $ | 601 | $ | 658 | ||||
| Deferred income tax liabilities | ||||||||
| Properties carrying value in excess of tax basis | 9,910 | 10,155 | ||||||
| Pensions carrying value in excess of tax basis | 1,228 | 1,084 | ||||||
| Intangibles carrying value in excess of tax basis | 764 | 824 | ||||||
| Investments carrying value in excess of tax basis | 452 | 498 | ||||||
| Other | 76 | 71 | ||||||
| Total deferred income tax liabilities | 12,430 | 12,632 | ||||||
| Total net deferred income tax liabilities | $ | 11,829 | $ | 11,974 | ||||
The Company’s consolidated effective tax rate differs from the expected Canadian federal statutory tax rate. Expected income tax expense at the Canadian federal statutory rate is reconciled to income tax expense as follows for 2025(1):
| For the year ended December 31 (in millions of Canadian dollars, except percentage) | 2025 | |||||||
Canadian federal statutory income tax rate(2) | $ | 822 | 15.00 | % | ||||
Provincial tax effects(3) | 276 | 5.03 | % | |||||
| Foreign tax effects | ||||||||
| United States | ||||||||
| Statutory rate difference between the United States and Canada | 65 | 1.19 | % | |||||
| State and local income taxes | 43 | 0.78 | % | |||||
| Tax credits | (51) | (0.93) | % | |||||
| Other | 10 | 0.18 | % | |||||
| Mexico | ||||||||
| Statutory rate difference between Mexico and Canada | 158 | 2.88 | % | |||||
Inflation(4) | (48) | (0.88) | % | |||||
| Other | 33 | 0.60 | % | |||||
| Switzerland | ||||||||
| Statutory rate difference between Switzerland and Canada | (52) | (0.95) | % | |||||
| Cantonal and local income taxes | 27 | 0.49 | % | |||||
| Other | 34 | 0.62 | % | |||||
| Other jurisdictions | 25 | 0.46 | % | |||||
| Nontaxable or nondeductible items | 11 | 0.20 | % | |||||
| Changes in unrecognized tax benefits | (1) | (0.02) | % | |||||
| Tax credits | (2) | (0.04) | % | |||||
| Other | (5) | (0.09) | % | |||||
| Effective tax rate | $ | 1,345 | 24.54 | % | ||||
(1) Rate reconciliation provided in accordance with the prospective adoption of ASU 2023-09 Income Taxes (Topic 740): Improvements to Income Tax Disclosures effective January 1, 2025.
(2) The Canadian federal statutory income tax rate is comprised of basic federal tax rate 38%, federal abatement (10%), and general rate reduction (13%).
(3) The majority of the provincial tax effects are derived from Ontario, Saskatchewan and British Columbia.
(4) Tax impact from inflation adjustment required for Mexico tax purposes.
The Company’s consolidated effective 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 2024 and 2023:
| For the year ended December 31 (in millions of Canadian dollars, except percentage) | 2024 | 2023 | ||||||
| Statutory federal and provincial income tax rate (Canada) | 26.11 | % | 26.11 | % | ||||
| Expected income tax expense (recovery) at Canadian enacted statutory tax rates | $ | 1,246 | $ | (797) | ||||
| (Decrease) increase in taxes resulting from: | ||||||||
Reversal of outside basis deferred income tax (Note 11) | — | (7,832) | ||||||
| Remeasurement loss of Kansas City Southern | — | 1,873 | ||||||
| (Gains) losses not subject to tax | (10) | 10 | ||||||
| Canadian tax rate differentials | (17) | (14) | ||||||
| Foreign tax rate differentials | (41) | (62) | ||||||
| Effect of tax rate decrease | (70) | (72) | ||||||
| Deduction for dividends taxed on outside basis | — | (68) | ||||||
| Unrecognized tax benefits | 3 | (10) | ||||||
| Inflation in Mexico | (33) | (31) | ||||||
| Valuation allowance | 5 | 1 | ||||||
| Other | (24) | 26 | ||||||
| Income tax expense (recovery) | $ | 1,059 | $ | (6,976) | ||||
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 recognized 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. 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 recognized 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, 2025, the Company had $56 million (2024 - $33 million) in tax effected operating losses carried forward recognized as a deferred income tax asset, which will begin to expire in 2026. The Company expects to fully utilize these tax effected operating losses before their expiry.
As at December 31, 2025, the Company had $5 million (2024 - $18 million) in tax effected capital losses carried forward recognized as a deferred income tax asset, which will begin to expire in 2029. The Company expects to fully utilize these tax effected capital losses before their expiry.
As at December 31, 2025, the Company had $4 million (2024 - $6 million) in tax credits carried forward recognized as a deferred income tax asset, which will begin to expire in 2028. The Company expects to fully utilize these tax credits before their expiry. 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 the years ended December 31:
| (in millions of Canadian dollars) | 2025 | 2024 | 2023 | ||||||||
| Unrecognized tax benefits at January 1 | $ | 29 | $ | 22 | $ | 20 | |||||
| Increase in unrecognized: | |||||||||||
| Tax benefits related to the current year | 1 | 1 | 2 | ||||||||
| Tax benefits related to prior years | 1 | 14 | 10 | ||||||||
| Tax benefits acquired with KCS | — | — | 2 | ||||||||
| Dispositions: | |||||||||||
| Gross uncertain tax benefits related to prior years | (4) | (1) | (6) | ||||||||
| Settlements with taxing authorities | — | (7) | (6) | ||||||||
| Unrecognized tax benefits at December 31 | $ | 27 | $ | 29 | $ | 22 | |||||
If these unrecognized tax benefits were recognized, $22 million of unrecognized tax benefits as at December 31, 2025 would impact the Company’s effective tax rate.
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 2025 was a $1 million expense (2024 - $4 million recovery; 2023 - $3 million recovery). The total amount of accrued interest, inflation and penalties associated with unrecognized tax benefits as at December 31, 2025 was $12 million (2024 - $11 million; 2023 - $15 million).
The following table provides income taxes paid (net of refunds received) for the year ended December 31(1):
| For the year ended December 31 (in millions of Canadian dollars) | 2025 | ||||
| Canada | |||||
| Federal | $ | 219 | |||
| Provincial | 162 | ||||
| U.S. | |||||
| Federal | 246 | ||||
| State | 55 | ||||
| Mexico | 346 | ||||
| Switzerland | |||||
| Federal | 65 | ||||
| Cantonal and local | 37 | ||||
| Other jurisdictions | 25 | ||||
| Total income tax paid | $ | 1,155 | |||
(1) Income taxes paid (net of refunds received) provided in accordance with the prospective adoption of ASU 2023-09 Income Taxes (Topic 740): Improvements to Income Tax Disclosures effective January 1, 2025.
The Company and its subsidiaries are subject to either Canadian federal and provincial income tax, U.S. federal, state and local income tax, Mexican federal 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 2020. The federal and provincial income tax returns filed for 2021 and subsequent years remain subject to examination by the Canadian taxation authorities. The U.S. income tax returns for 2022 and subsequent years continue to remain subject to examination by the Internal Revenue Service and U.S. state tax jurisdictions, with the exception of certain states that have ongoing audits for prior years. Kansas City Southern de México, S.A. de C.V. (also known as Canadian Pacific Kansas City Mexico) ("CPKCM") has concluded audit examinations for Mexican income tax returns for the tax years through 2021, except for the 2014 tax year which is currently in litigation before the Federal Collegiate Circuit Courts (see Note 26). The CPKCM Mexican income tax returns filed for 2022, and subsequent years remain subject to examination by the Mexican Tax Authority, Servicio de Administración Tributaria ("SAT"). There are certain other Mexican subsidiaries with ongoing audits for the years 2016-2020. As at December 31, 2025, 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
During the year, the Company received final audit letters for CPKCM for 2021 and a payment of $11 million was made in respect of that year. 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.Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 26, 2026 | Showing above |
| 2024 | Feb 27, 2025 | |
| 2023 | Feb 27, 2024 | |
| 2022 | Feb 24, 2023 | |
| 2021 | Feb 23, 2022 | |
| 2020 | Feb 18, 2021 | |
| 2019 | Feb 20, 2020 | |
| 2018 | Feb 15, 2019 | |
| 2017 | Feb 16, 2018 | |
| 2016 | Feb 16, 2017 | |
| 2015 | Feb 29, 2016 | |
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.