exv4w7





Exhibit 4.7


SUPPLEMENTAL UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES DIFFERENCES AND DISCLOSURES

As at December 31, 2007 and 2006 and for the years ended December 31, 2007, 2006 and 2005


In millions of Canadian dollars, except per share data


This information should be read in conjunction with the audited annual consolidated financial
statements of Canadian Pacific Railway Limited (“CP” or “the Company”) as at December 2007 and 2006
and for each of the years in the three year period ended December 31, 2007. Material differences
between Canadian and U.S. generally accepted accounting principles (“GAAP”) are described in Note
24 of the Company’s December 31, 2007 consolidated financial statements. Presentation of the
following additional differences and disclosures required under U.S. GAAP and Regulation S-X of the
United States Securities and Exchange Commission (“Regulation S-X”) as specified in Item 18 of Form
20-F are as follows:


Accounts receivable and other current assets


As at December 31, 2007 and 2006, accounts receivable and other current assets consisted of the
following amounts:



	 	 	 	 	 	 	 	 	 
	In millions of Canadian dollars	 	2007	 	 	2006	 
	 
	Freight
	 	$	327.2	 	 	$	350.2	 
	Non-freight
	 	 	182.4	 	 	 	209.4	 
	 
	 
	 	 	509.6	 	 	 	559.6	 
	Allowance for doubtful accounts
	 	 	(18.5	)	 	 	(19.2	)
	 
	 
	 	 	491.1	 	 	 	540.4	 
	Other current assets
	 	 	51.7	 	 	 	75.3	 
	 
	 
	 	$	542.8	 	 	$	615.7	 
	 





Short-term borrowings


The weighted average interest rate on short term borrowings for each of the years ended December
31, 2007, 2006 and 2005 are as follows:



	 	 	 	 	 
	Year	 	Weighted Average Interest Rate	 
	 
	2007
	 	 	5.56	%
	2006
	 	 	5.16	%
	2005
	 	 	5.12	%
	 





1








 





Accounts payable and accrued liabilities




As at December 31, 2007 and 2006, accounts payable and accrued liabilities consisted of the
following amounts:



	 	 	 	 	 	 	 	 	 
	In millions of Canadian dollars	 	2007	 	 	2006	 
	 
	 
	 	 	 	 	 	 	 	 
	Trade payables
	 	$	255.8	 	 	$	287.9	 
	 
	 	 	 	 	 	 	 	 
	Payroll-related accruals
	 	 	137.0	 	 	 	141.2	 
	 
	 	 	 	 	 	 	 	 
	Accrued vacation
	 	 	83.4	 	 	 	86.3	 
	 
	 	 	 	 	 	 	 	 
	Accrued charges
	 	 	252.2	 	 	 	213.4	 
	 
	 	 	 	 	 	 	 	 
	Accrued interest
	 	 	61.5	 	 	 	64.2	 
	 
	 	 	 	 	 	 	 	 
	Personal injury and other claims provision
	 	 	78.6	 	 	 	80.6	 
	 
	 	 	 	 	 	 	 	 
	Workforce reduction provisions
	 	 	58.1	 	 	 	73.8	 
	 
	 	 	 	 	 	 	 	 
	Other
	 	 	54.2	 	 	 	55.2	 
	 
	 
	 	$	980.8	 	 	$	1,002.6	 
	 






Stock-based compensation




At December 31, 2007, the Company had several stock-based compensation plans, including stock
option plans, a Deferred Share Unit plan (DSU), a Restricted Stock Unit plan (RSU), a Performance
Stock Unit plan (PSU) and an employee stock savings plan. Effective January 1, 2006, the Company
adopted Statement of Financial Accounting Standard 123 Revised 2004 — “Share Based Payment” (“FASB
123R”), on a modified prospective basis for U.S. GAAP purposes. The following additional
disclosures are required under FASB 123R.



Significant assumptions




The Company utilized an estimated forfeiture rate of 2.1% in 2007 (2006 — 2.0%, 2005 — 1.5%) in
determining the fair value of its equity option plans. This rate is monitored on a periodic basis
to ensure that CP does not surpass this estimate. The Company has based this forfeiture rate on
historical information and does not anticipate material changes in future years.



In assessing the fair value of CP’s equity option plans, the dividend yield is determined by the
current annual dividend by the current stock price. The Company does not employ different dividend
yields throughout the year. The risk free rate utilized in determining fair values is based on the
implied yield available on zero-coupon government issues with an equivalent remaining term at the
time of the grant.



Currently, the Company is not subject to post vesting restrictions on its stock option plans prior
to expiry.



Disclosure of non-vested options




The Company’s non-vested options consist of options granted under the Company’s stock option plan.
A summary of the status of non-vested stock options as at December 31, 2007 and changes during the
year is presented below:



	 	 	 	 	 	 	 	 	 
	 	 	Non-vested options	 
	 	 	 	 	 	 	Weighted average	 
	 	 	 	 	 	 	grant date fair	 
	 	 	Number of options	 	 	value per option	 
	 
	 
	 	 	 	 	 	 	 	 
	Outstanding, January 1, 2007
	 	 	3,889,350	 	 	$	10.50	 
	 
	 	 	 	 	 	 	 	 
	New options granted
	 	 	1,304,500	 	 	 	13.25	 
	 
	 	 	 	 	 	 	 	 
	Forfeited
	 	 	(27,350	)	 	 	12.45	 
	 
	 	 	 	 	 	 	 	 
	Vested
	 	 	(2,220,400	)	 	 	9.36	 
	 
	Outstanding, December 31, 2007
	 	 	2,946,100	 	 	$	12.57	 
	 






2









 





Aggregate intrinsic value of options outstanding and exercisable




The following table provides the number of stock options outstanding and exercisable as at December
31, 2007 by range of exercise prices and the aggregate intrinsic value for in-the-money stock
options. The aggregate intrinsic value represents the amount that would have been received by the
option holders had the option holders exercised their options on December 31, 2007 at the Company’s
closing stock price of $64.22.



	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Options outstanding	 	 	Options exercisable	 
	 	 	 	 	 	 	Aggregate	 	 	 	 	 	 	Aggregate	 
	 	 	 	 	 	 	intrinsic value	 	 	 	 	 	 	intrinsic value	 
	 	 	 	 	 	 	in millions of	 	 	 	 	 	 	in millions of	 
	Range of exercise prices	 	Number of options	 	 	Canadian dollars	 	 	Number of options	 	 	Canadian dollars	 
	 
	$14.07 - $18.96
	 	 	184,225	 	 	$	9.1	 	 	 	184,225	 	 	$	9.1	 
	$27.62 - $36.64
	 	 	2,812,483	 	 	 	92.6	 	 	 	2,812,483	 	 	 	92.6	 
	$42.05 - $74.89
	 	 	3,984,400	 	 	 	39.9	 	 	 	1,038,300	 	 	 	19.7	 
	 
	Total
	 	 	6,981,108	 	 	$	141.6	 	 	 	4,035,008	 	 	$	121.4	 
	 






Options exercised




The following table provides information related to options exercised in the stock option plan
during the years ended December 31, 2007, 2006, and 2005.



	 	 	 	 	 	 	 	 	 	 	 	 	 
	In millions of Canadian dollars	 	2007	 	 	2006	 	 	2005	 
	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Total intrinsic value
	 	$	31.9	 	 	$	18.2	 	 	$	3.4	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Cash received by the Company upon exercise
of options
	 	 	26.5	 	 	 	17.0	 	 	 	3.7	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Related tax benefits realized
	 	 	0.4	 	 	 	0.8	 	 	 	0.4	 
	 






Total fair value of stock option plan shares vested during the year




The following table refers to the total fair value of shares vested for stock option plan during
the year for each of the years ended December 31, 2007, 2006 and 2005:



	 	 	 	 	 	 	 	 	 	 	 	 	 
	In millions of Canadian dollars	 	2007	 	 	2006	 	 	2005	 
	 
	Regular stock option plan
	 	$	8.8	 	 	$	8.7	 	 	$	4.5	 
	Performance stock option plan
	 	 	12.0	 	 	 	5.0	 	 	 	—	 
	 
	Total
	 	$	20.8	 	 	$	13.7	 	 	$	4.5	 
	 






3









 





Share based liabilities paid




The following table refers to the total share based liabilities paid for each of the years ended
December 31 2007, 2006 and 2005:



Plan




	 	 	 	 	 	 	 	 	 	 	 	 	 
	In millions of Canadian dollars	 	2007	 	 	2006	 	 	2005	 
	 
	SARs
	 	$	5.7	 	 	$	2.4	 	 	$	1.4	 
	Replacement Options and SARs
	 	 	—	 	 	 	0.1	 	 	 	0.3	 
	DSU
	 	 	6.5	 	 	 	1.6	 	 	 	1.7	 
	 
	Total
	 	$	12.2	 	 	$	4.1	 	 	$	3.4	 
	 






Capitalized stock compensation




Capitalized compensation expenditures, included as part of the cost of assets, were $0.7 million in
2007 (2006 — $nil; 2005 — $nil).



Unrecognized compensation costs




For the fiscal year ended 2007, the unrecognized compensation costs were as follows:



Plan




	 	 	 	 	 	 	 	 	 
	 	 	Unrecognized	 	 	Weighted average	 
	 	 	compensation	 	 	remaining	 
	In millions of Canadian dollars	 	costs	 	 	recognition period	 
	 
	 
	 	 	 	 	 	 	 	 
	Stock Option Plan
	 	$	7.0	 	 	1.7 years
	 
	 	 	 	 	 	 	 	 
	PSU
	 	 	2.4	 	 	2.2 years
	 
	 	 	 	 	 	 	 	 
	SAR
	 	 	1.9	 	 	1.1 years
	 
	 	 	 	 	 	 	 	 
	RSU
	 	 	0.9	 	 	2.4 years
	 
	 	 	 	 	 	 	 	 
	DSU
	 	 	0.8	 	 	1.5 years
	 






Stock compensation expense




The total compensation cost charged to income in respect of the Company’s stock-based compensation
plans under U.S. GAAP was $35.4 million for the year ended December 31, 2007 (2006 — $55.1
million; 2005 — $42.1 million).



Income taxes




Deferred income taxes reconciliation




The rate utilized in reconciling income tax expense between the amount computed per the Statement
of Consolidated Income and the applicable statutory federal and provincial income tax rate amounts
to 30.58% for 2007 (2006 — 32.95%; 2005 — 35.87%). This rate is the applicable statutory income
tax rate as enacted by the federal and provincial governments in Canada.



Expiry of tax losses and credits




At December 31, 2007, the Company has income tax operating losses carried forward of $48.3 million,
certain of which will begin to expire in 2013. In addition, the Company has income tax capital
losses carried forward of $50.5 million that do not expire. The Company also has alternative
minimum tax credits of approximately $3.5 million that carry forward indefinitely as well as
investment tax credits of $24.1 million, of which $1.0 million expires in 2008, $3.8 million
expires in 2009 to 2011, and $19.3 million expires in 2012 to 2016.



Disclosure of uncertainty in income tax positions




The following table provides a reconciliation of uncertain tax positions in relation to
unrecognized tax benefits for Canada and the United States for the year ended December 31, 2007:



4









 





	 	 	 	 	 
	In millions of Canadian dollars	 	2007	 
	 
	 
	 	 	 	 
	Gross unrecognized tax benefits at January 1, 2007
	 	$	64.0	 
	 
	 	 	 	 
	Additions:
	 	 	 	 
	Gross uncertain tax benefits related to the current year
	 	 	6.6	 
	Gross uncertain tax benefits related to prior years
	 	 	8.5	 
	Accrued interest on uncertain tax benefits
	 	 	5.9	 
	 
	 	 	 	 
	Dispositions:
	 	 	 	 
	Gross uncertain tax benefits related to prior years
	 	 	(5.0	)
	Accrued interest on uncertain tax benefits
	 	 	(0.8	)
	 
	Gross unrecognized tax benefits as at December 31, 2007
	 	$	79.2	 
	 
	Net unrecognized tax benefits as at December 31, 2007
	 	$	79.2	 
	 






As at December 31, 2007, the total amount of gross unrecognized tax positions amounts to $79.2
million prior to the consideration of reductions in relation to the lapse of applicable statute of
limitations between taxation authorities. If these uncertain tax positions were recognized all of
the net amount of unrecognized tax positions as at December 31, 2007 would impact the Company’s
effective tax rate.



The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a
component of income tax expense in the Company’s Statement of Consolidated Income. The total
amount of interest and penalties recognized in the 2007 Statement of Consolidated Income amounts to
$5.2 million and $1.2 million, respectively. The total amounts of interest and penalties
recognized in the 2007 Consolidated Balance Sheet amount to the same.



The Company and its subsidiaries are subject to either Canadian federal and provincial income tax,
U.S. federal, state and local 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 2003. The federal and provincial income tax returns filed for
2004 and subsequent years remain subject to examination by the taxation authorities.



All U.S. federal income tax returns and generally all U.S. state and local income tax returns are
closed to 2004. The income tax returns for 2005 and subsequent years continue to remain subject to
examination by the taxation authorities.



The Company does not anticipate any material changes to the unrecognized tax benefits previously
disclosed within the next 12 months as at December 31, 2007.



Pensions and other benefits




The Pension Committee of the Board of Directors has approved an investment policy that establishes
long-term asset mix targets which take into account the Company’s expected risk tolerances.
Pension plan assets are managed by a suite of independent investment managers, with the allocation
by manager reflecting these asset mix targets. Most of the assets are actively managed with the
objective of outperforming applicable capital market indices. In accordance with the investment
policy, derivative instruments are used to partially hedge foreign currency exposures and to reduce
asset/liability interest rate mismatch risk. The investment policy allows the managers to invest
in securities of the Company or its subsidiaries, subject to prescribed limits.



To develop the expected long-term rate of return assumption used in the calculation of net periodic
benefit cost applicable to the market-related value of assets, the Company considers both its past
experience and future estimates of long-term investment returns, the expected composition of the
plans’ assets as well as the expected long-term market returns in the future. The Company has
elected to use a market-related value of assets, developed from a five-year average of market
values for the plans’ public equity securities (with each prior year’s market value adjusted to the
current date for assumed investment income during the intervening period) plus the market value of
the plans’ fixed income, real estate and infrastructure securities.



5









 





The pension obligation is discounted using a discount rate that is a blended interest rate for a
portfolio of high-quality corporate debt instruments that has the same duration as the pension
obligation. The discount rate is determined by management with the aid of third-party actuaries.



Under U.S. GAAP the pension plans’ accumulated benefit obligation as at December 31, 2007 and 2006
was $7,464.2 million and $7,340.3 million, respectively.



Total contributions for all of the Company’s defined benefit pension plans are expected to be
approximately $95 million in 2008.



Estimated future benefit payments




The estimated future pension benefit payments for each of the next five years and the subsequent
five-year period are as follows:



	 	 	 	 	 
	In millions of Canadian dollars	 	Pensions	 
	 
	 
	 	 	 	 
	2008
	 	$	414.4	 
	 
	 	 	 	 
	2009
	 	 	424.7	 
	 
	 	 	 	 
	2010
	 	 	437.5	 
	 
	 	 	 	 
	2011
	 	 	452.4	 
	 
	 	 	 	 
	2012
	 	 	469.4	 
	 
	 	 	 	 
	2013 - 2017
	 	 	2,665.1	 
	 






Components of net periodic benefit cost




The elements of net periodic benefit cost under U.S. GAAP for defined benefit pension plans and
other benefits recognized included the following components:



Pensions under U.S. GAAP




	 	 	 	 	 	 	 	 	 	 	 	 	 
	In millions of Canadian dollars	 	2007	 	 	2006	 	 	2005	 
	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Current service cost
	 	$	97.6	 	 	$	101.9	 	 	$	75.7	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Interest cost
	 	 	420.0	 	 	 	400.0	 	 	 	405.0	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Expected return on plan assets
	 	 	(554.2	)	 	 	(526.2	)	 	 	(498.6	)
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Amortization of transitional obligation
	 	 	—	 	 	 	0.6	 	 	 	1.2	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Amortization of prior service cost
	 	 	27.6	 	 	 	26.7	 	 	 	25.8	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Recognized net actuarial loss
	 	 	65.6	 	 	 	67.3	 	 	 	19.9	 
	 	 	 	 	 
	Net periodic benefit cost
	 	$	56.6	 	 	$	70.3	 	 	$	29.0	 
	 	 	 	 	 






6









 





Other benefits under U.S. GAAP




	 	 	 	 	 	 	 	 	 	 	 	 	 
	In millions of Canadian dollars	 	2007	 	 	2006	 	 	2005	 
	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Current service cost
	 	$	16.8	 	 	$	15.1	 	 	$	13.8	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Interest cost
	 	 	26.7	 	 	 	26.6	 	 	 	27.3	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Expected return on plan assets
	 	 	(0.6	)	 	 	(0.6	)	 	 	(0.7	)
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Amortization of prior service cost
	 	 	(1.6	)	 	 	(1.6	)	 	 	(1.2	)
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Recognized net actuarial loss
	 	 	2.9	 	 	 	4.2	 	 	 	12.9	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Settlement gain
	 	 	(10.7	)	 	 	—	 	 	 	—	 
	 
	Net periodic benefit cost
	 	$	33.5	 	 	$	43.7	 	 	$	52.1	 
	 






Amounts recognized in Consolidated Balance Sheet under U.S. GAAP




Under U.S. GAAP, amounts for the Company’s defined benefit plans in the Consolidated Balance Sheet
were as follows:



	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Pensions	 	 	Other Benefits	 
	In millions of Canadian dollars	 	2007	 	 	2006	 	 	2007	 	 	2006	 
	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Current liabilities
	 	$	—	 	 	$	—	 	 	$	38.4	 	 	$	38.9	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Non current liabilities
	 	 	415.3	 	 	 	243.5	 	 	 	440.8	 	 	 	458.7	 
	 






Amounts recognized in accumulated other comprehensive income under U.S. GAAP




Under U.S. GAAP, accumulated other comprehensive income includes the following amounts for the
Company’s defined benefit plans:



	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	Pensions	 	 	Other Benefits	 
	In millions of Canadian dollars	 	2007	 	 	2006	 	 	2007	 	 	2006	 
	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Net actuarial loss
	 	$	1,139.7	 	 	$	933.5	 	 	$	140.8	 	 	$	155.0	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Prior service cost
	 	 	182.8	 	 	 	188.0	 	 	 	(7.9	)	 	 	(9.6	)
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Deferred income tax
	 	 	(402.8	)	 	 	(362.2	)	 	 	(42.4	)	 	 	(45.9	)
	 	 	 	 	 	 	 	 	 
	Total
	 	$	919.7	 	 	$	759.3	 	 	$	90.5	 	 	$	99.5	 
	 	 	 	 	 	 	 	 	 






7









 





Amounts recognized in other comprehensive income under U.S. GAAP




Under U.S. GAAP, other comprehensive income includes the following amounts for the Company’s
defined benefit plans:



Unfunded pension/minimum pension liability




	 	 	 	 	 	 	 	 	 	 	 	 	 
	In millions of Canadian dollars	 	2007	 	 	2006	 	 	2005	 
	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Net actuarial loss arising during the period
	 	$	269.8	 	 	$	—	 	 	$	—	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Prior service cost arising during the period
	 	 	22.5	 	 	 	—	 	 	 	—	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Amortization of net actuarial loss included
in net periodic benefit cost
	 	 	(65.6	)	 	 	—	 	 	 	—	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Amortization of prior service cost included
in net periodic benefit cost
	 	 	(27.6	)	 	 	—	 	 	 	—	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Minimum pension liability adjustment
	 	 	—	 	 	 	783.3	 	 	 	(254.3	)
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Deferred income tax
	 	 	(38.7	)	 	 	(275.7	)	 	 	88.4	 
	 
	Total
	 	$	160.4	 	 	$	507.6	 	 	$	(165.9	)
	 






Unfunded post-retirement benefits




	 	 	 	 	 	 	 	 	 	 	 	 	 
	In millions of Canadian dollars	 	2007	 	 	2006	 	 	2005	 
	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Net actuarial (gain) arising during the period
	 	$	(11.3	)	 	$	—	 	 	$	—	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Prior service cost arising during the period
	 	 	0.1	 	 	 	—	 	 	 	—	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Amortization of net actuarial loss included
in net periodic benefit cost
	 	 	(2.9	)	 	 	—	 	 	 	—	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Amortization of prior service cost included
in net periodic benefit cost
	 	 	1.6	 	 	 	—	 	 	 	—	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Deferred income tax
	 	 	3.5	 	 	 	—	 	 	 	—	 
	 
	Total
	 	$	(9.0	)	 	$	—	 	 	$	—	 
	 






The unamortized actuarial loss and the unamortized prior service cost included in accumulated other
comprehensive income that is expected to be recognized in net periodic benefit cost during 2008 are
$48.0 million and $28.3 million, respectively, for pensions and $8.1 million and a recovery of $1.8
million, respectively, for other post-retirement benefits.



Business combination




Dakota, Minnesota and Eastern Railroad Corporation (“DM&E”) was acquired in October 2007 and is
wholly owned. The purchase was subject to review and approval by the U.S. Surface Transportation
Board (“STB”), during which time the shares of DM&E were placed in a voting trust. The STB
approved the purchase effective on October 30, 2008, at which time the Company assumed control of
the DM&E.



8









 





The acquisition of DM&E was a strategic expansion of CP’s network. DM&E is connected to the CP
network at Minneapolis, Chicago and Winona. DM&E also has connections to and interchanges with all
seven Class 1 railroads and is proximate to the Powder River Basin, which contains the largest
deposit of low-cost, low sulphur coal in North America. The growing regional franchise of DM&E,
the expansion of CP’s network and the synergies generated from this acquisition supported the
purchase price of $1.5 billion including approximately $163 million for goodwill. The goodwill is
not tax deductible.



U.S. GAAP requires unaudited supplemental pro forma income statement information for the period in
which a material business combination occurs. Material business combinations must be presented, on
a pro forma basis, as if the acquisition had taken place at the beginning of the fiscal period and
the immediately preceding comparative period. Pro forma results are not indicative of actual
results or future performance. The pro forma information presented below assumes this acquisition
took place on January 1, 2007 and 2006, respectively.



	 	 	 	 	 	 	 	 	 
	 	 	2007	 	 	2006	 
	In millions of Canadian dollars, except per share data	 	(unaudited)	 	 	(unaudited)	 
	 
	 
	 	 	 	 	 	 	 	 
	Pro forma revenue
	 	$	5,019.6	 	 	$	4,881.6	 
	 
	 	 	 	 	 	 	 	 
	Pro forma net income
	 	$	976.2	 	 	$	833.7	 
	 
	 	 	 	 	 	 	 	 
	Pro forma basic earnings per share
	 	$	6.34	 	 	$	5.30	 
	 
	 	 	 	 	 	 	 	 
	Pro forma diluted earnings per share
	 	$	6.27	 	 	$	5.25	 
	 






Significant equity method investee




The following table represents a summary of significant accounts for the Company’s investment in
DM&E accounted for on an equity basis as at December 31, 2007. Income statement items presented in
the following table reflect the operations in DM&E from the acquisition date of October 4, 2007 to
December 31, 2007:



	 	 	 	 	 
	In millions of Canadian dollars	 	2007	 
	 
	 
	 	 	 	 
	Current assets
	 	$	177.2	 
	 
	 	 	 	 
	Non-current assets
	 	 	2,148.2	 
	 
	 	 	 	 
	Current liabilities
	 	 	168.9	 
	 
	 	 	 	 
	Non-current liabilities
	 	 	661.4	 
	 
	 	 	 	 
	Revenues
	 	 	72.1	 
	 
	 	 	 	 
	Revenues less operating expenses
	 	 	21.6	 
	 
	 	 	 	 
	Net income
	 	 	12.3	 
	 






Environmental remediation




Environmental remediation accruals cover site-specific remediation programs. Environmental
remediation accruals are measured on an undiscounted basis and are recorded when the costs to
remediate are probable and reasonably estimable. The estimate of the probable costs to be incurred
in the remediation of properties contaminated by past railway use reflects the nature of
contamination at individual sites according to typical activities and scale of operations
conducted. CP has developed remediation strategies for each property based on the nature and
extent of the contamination, as well as the location of the property and surrounding areas that may
be adversely affected by the presence of contaminants, considering available technologies,
treatment and disposal facilities and the acceptability of site-specific plans based on the local
regulatory environment. Site-specific plans range from containment and risk management of the
contaminants through to the removal and treatment of the contaminants and affected soils and ground
water. The details of the estimates reflect the environmental liability at each property.
Provisions for environmental remediation costs are recorded in “Deferred liabilities”, except for
the current portion, which is recorded in “Accounts payable and accrued liabilities.”



Accruals for environmental remediation may change from time to time as new information about
previously untested sites becomes known. The accruals may also vary as the courts decide legal
proceeding against outside parties responsible for contamination. These potential charges, which
cannot be quantified at this time, are not expected to



9









 







be material to CP’s financial position, but may materially affect income in the period in which a
charge is recognized. Material increases to costs would be reflected as increases to “Deferred
liabilities” on CP’s Consolidated Balance Sheet and to “Special charges” within operating expenses
on CP’s Statement of Consolidated Income.



Statement of consolidated cash flows




Income taxes paid




U.S. GAAP requires the disclosure of income taxes paid. Canadian GAAP requires the disclosure of
income tax cash flows, which would include any income taxes recovered during the year. Income
taxes paid were $18.8 million, $58.4 million and $10.3 million in 2007, 2006 and 2005,
respectively.



Dividends declared




Dividends declared per share were $0.9000, $0.7500 and $0.5825 in 2007, 2006 and 2005,
respectively.



Balance sheet presentation




Authorized and issued common shares




Under U.S. GAAP, the number of authorized and issued common shares as disclosed in Note 19 to the
consolidated financial statements would be disclosed on the face of the Consolidated Balance Sheet.



Net properties




Under U.S. GAAP, the following disclosure of properties held under capital leases by class of asset
would be included:



	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	2007	 	 	2006	 
	In millions of Canadian dollars	 	Cost	 	 	Accum.
Depreciation	 	 	Net Book
Value	 	 	Cost	 	 	Accum.
Depreciation	 	 	Net Book
Value	 
	 
	Properties held
under capital
leases
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Rolling Stock
	 	$	501.2	 	 	$	127.1	 	 	$	374.1	 	 	$	520.3	 	 	$	112.3	 	 	$	408.0	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Other
	 	 	2.2	 	 	 	0.4	 	 	 	1.8	 	 	 	2.2	 	 	 	0.1	 	 	 	2.1	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	Total properties
held under capital
leases
	 	$	503.4	 	 	$	127.5	 	 	$	375.9	 	 	$	522.5	 	 	$	112.4	 	 	$	410.1	 
	 






Presentation of income statement components




Revenues




Revenues are presented net of taxes collected from customers and remitted to governmental
authorities.



Operating income before the following




Under U.S. GAAP, the subtotal “Operating income before the following” would not be presented on the
Statement of Consolidated Income.



Interest expense




Under U.S. GAAP and Regulation S-X, interest expense should not be presented on a net basis on the
face of the Statement of Consolidated Income. This is allowed when there is appropriate disclosure
in the notes to the financial statements under Canadian GAAP as in Note 5.



10









 





Rental expense for operating leases




Rental expense for operating leases for the years ended 2007, 2006 and 2005 was $200.5 million,
$194.0 million and $209.5 million, respectively.



Amortization of discount on accruals




Under U.S. GAAP, amortization of discount on accruals recorded at present value for restructuring
and workers’ compensation totaling $8.1 million, $10.0 million and $15.4 million in 2007, 2006 and
2005, respectively, should be presented in operating expenses, whereas under Canadian GAAP these
expenses are presented within “Other income and charges”.



Income before income tax expense and equity income




Regulation S-X requires the presentation of income before tax expense and equity income on the face
of the Statement of Consolidated Income. In 2007 this totaled $1,078.6 million (2006 — $906.2
million; 2005 — $813.6 million).




11











 











	 	 	 
	 

	 	PricewaterhouseCoopers LLP
	 

	 	Chartered Accountants
	 

	 	111 5th Avenue SW, Suite 3100
	 

	 	Calgary, Alberta
	 

	 	Canada T2P 5L3
	 

	 	Telephone +1 (403) 509 7500
	 

	 	Facsimile +1 (403) 781 1825






Report of Independent Auditors on

Supplemental United States Generally Accepted Accounting Principles Differences and

Disclosures




To the Board of Directors of Canadian Pacific Railway Limited



Our audits of the consolidated financial statements as at December 31, 2007 and 2006 and for each
of the years in the three year period ended December 31, 2007 and the effectiveness of internal
control over financial reporting as at December 31, 2007 and 2006 referred to in our report dated
February 19, 2008 appearing in the Annual Report on Form 40-F of Canadian Pacific Railway Limited
(the “Company”) for the year ended December 31, 2007 also included an audit of the related
“Supplemental United States Generally Accepted Accounting Principles Differences and Disclosures”
of the Company as at December 31, 2007 and 2006 and for the years ended December 31, 2007, 2006 and
2005 which is included herein and was prepared pursuant to the disclosure requirement of Item 18 of
Form 20-F. In our opinion, the “Supplemental United States Generally Accepted Accounting Principles
Differences and Disclosures” presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial statements.




	 	 	 
	/s/ PricewaterhouseCoopers LLP
 

PricewaterhouseCoopers LLP

	 	 
	Chartered Accountants
	 	 






Calgary, Alberta, Canada

February 19, 2008



PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP and the other
member firms of PricewaterhouseCoopers International Limited, each of which is a separate and
independent legal entity.