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U.S. SECURITIES AND EXCHANGE COMMISSION  FORM 40-F [           ]
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934OR[    X    ]
    
    ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2004    CANADIAN PACIFIC RAILWAY LIMITED
(Commission File No. 1-01342)
CANADIAN PACIFIC RAILWAY COMPANY
(Commission File No. 1-15272) (Exact name of Registrant as specified in its charter) CANADA
    
    
    4011
    
    
    98-0355078(Canadian Pacific Railway Limited)98-0001377(Canadian Pacific Railway Company)(Province or other
jurisdiction of
incorporation or
organization)
    
    (Primary Standard
Industrial
Classification Code
Number)
    
    (I.R.S. Employer Identification Number)
 Suite 500, Gulf Canada Square, 401-9th Avenue S.W., Calgary, Alberta, Canada T2P 4Z4
(403) 319-7000 (Address and telephone number of Registrants principal executive offices)
 CT Corporation System, 111-8th Avenue, New York, New York 10011, (212) 894-8940 (Name, address (including zip code) and telephone number (including area code) of Agent for
Service of Canadian Pacific Railway Limited in the United States)
 The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street
Wilmington, Delaware 19801, (302) 658-7581 (Name, address (including zip code) and telephone number (including area code) of Agent for
Service of Canadian Pacific Railway Company in the United States)
 Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Shares of
Canadian Pacific Railway Limited
    
    New York Stock ExchangePerpetual 4% Consolidated Debenture Stock
of Canadian Pacific Railway Company
    
    New York Stock Exchange
 Securities registered or to be registered pursuant to Section 12(g) of the Act: None Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None  [ X ] Annual information form
    
    [ X ] Audited annual financial statements
 Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report. At December 31, 2004, 158,779,413 Common Shares of Canadian Pacific Railway Limited were issued and
outstanding. At December 31, 2004, 347,170,009 Ordinary Shares of Canadian Pacific Railway Company
were issued and outstanding. Indicate by check mark whether the Registrant by filing the information contained in this Form is
also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the
Securities Exchange Act of 1934 (the Exchange Act). If Yes is marked, indicate the file number
assigned to the Registrant in connection with such Rule. YES ___
    
    NO X
 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X
    
    NO ___




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PRIOR FILINGS MODIFIED AND SUPERSEDED The Registrants Annual Report on Form 40-F for the year ended December 31, 2004, at the time
of filing with the Securities and Exchange Commission, modifies and supersedes all prior documents
filed pursuant to Sections 13 and 15(d) of the Exchange Act for purposes of any offers or sales of
any securities after the date of such filing pursuant to any Registration Statement under the
Securities Act of 1933 of either Registrant which incorporates by reference such Annual Report,
including without limitation the following: Form S-8 No. 333-13846 (Canadian Pacific Railway
Limited); and Form S-8 No. 333-13962 (Canadian Pacific Railway Limited). The documents (or
portions thereof) identified under the heading Documents Filed as Part of This Report below as
forming part of this Form 40-F are incorporated by reference into the Registration Statement on
Form F-9 No. 333-114696 (Canadian Pacific Railway Company) as exhibits thereto. CONSOLIDATED AUDITED ANNUAL FINANCIAL STATEMENTS AND
MANAGEMENTS DISCUSSION AND ANALYSIS A.      Audited Annual Financial Statements For consolidated audited financial statements, including the report of the auditors with
respect thereto, see pages 42 through 88 of the Registrants 2004 Annual Report incorporated by
reference and included herein. For a reconciliation of important differences between Canadian and
United States generally accepted accounting principles, see Note 25  Supplementary Data of the
Notes to Consolidated Financial Statements on pages 80 through 88 of such 2004 Annual Report. B.      Managements Discussion and Analysis For managements discussion and analysis, see pages 4 through 41 of the Registrants 2004
Annual Report incorporated by reference and included herein. For the purposes of this Annual Report on Form 40-F, only pages 4 through 88 of the
Registrants 2004 Annual Report referred to above shall be deemed filed, and the balance of such
2004 Annual Report, except as it may be otherwise specifically incorporated by reference in the
Registrants Annual Information Form, shall be deemed not filed with the Securities and Exchange
Commission as part of this Annual Report on Form 40-F under the Exchange Act. DISCLOSURE CONTROLS AND PROCEDURES As of December 31, 2004, an evaluation was carried out under the supervision of and with the
participation of the Registrants management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Registrants disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the design and operation of these disclosure
controls and procedures were effective as of December 31, 2004, to ensure that information required
to be disclosed by the Registrants in reports that they file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commission rules and forms. CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING During the period covered by this Annual Report on Form 40-F no changes occurred in the
Registrants internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Registrants internal control over financial reporting. 2




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CODE OF BUSINESS ETHICS The Registrants Code of Business Ethics was last revised in late 2003 to ensure that it was
in compliance with the corporate governance standards of the New York Stock Exchange (NYSE
Standards). The Code applies to all directors, officers and employees, both unionized and
non-unionized, of the Registrants and their subsidiaries in Canada, the U.S. and elsewhere, and
forms part of the terms and conditions of employment of all such individuals. Contractors engaged
on behalf of the Registrants or their subsidiaries must undertake, as a condition of their
engagement, to adhere to principles and standards of business conduct consistent with those set
forth in the Code. The Code is available on the Registrants web site at www.cpr.ca and in print
to any shareholder who requests it. All amendments to the Code, and all waivers of the Code with
respect to any director or executive officer of the Registrants, will be posted on the Registrants
web site and provided in print to any shareholder who requests them. CODE OF ETHICS FOR CHIEF EXECUTIVE OFFICER AND SENIOR FINANCIAL OFFICERS The Registrants adopted a Code of Ethics for Chief Executive Officer and Senior Financial
Officers in 2003. This code applies to the Registrants President and Chief Executive Officer, the
Executive Vice-President and Chief Financial Officer and the Vice-President and Comptroller. It is
available on the Registrants web site at www.cpr.ca and in print to any shareholder who requests
it. All amendments to the code, and all waivers of the code with respect to any of the officers
covered by it, will be posted on the Registrants web site and provided in print to any shareholder
who requests them. CORPORATE GOVERNANCE PRINCIPLES AND GUIDELINES The Registrants amended their Corporate Governance Principles and Guidelines in 2004. These
principles and guidelines pertain to such matters as, but are not limited to: director
qualification standards and responsibilities; access by directors to management and independent
advisors; director compensation; director orientation and continuing education; management
succession; and annual performance evaluations of the board, including its committees and
individual directors, and of the Chief Executive Officer. The Corporate Governance Principles and
Guidelines are available on the Registrants web site at www.cpr.ca and in print to any shareholder
who requests them. COMMITTEE TERMS OF REFERENCE The terms of reference of each of the following committees of the Registrants are available on
the Registrants web site at www.cpr.ca and in print to any shareholder who requests them: the
Audit, Finance and Risk Management Committee; the Corporate Governance and Nominating Committee;
the Management Resources and Compensation Committee; the Environmental and Safety Committee; and
the Pension Trust Fund Committee. DIRECTOR INDEPENDENCE The boards of the Registrants have adopted the criteria for director independence and
unrelatedness: (a) prescribed by Section 10A(m)(3) of the Exchange Act and Rule 10A-3(b)(1)
promulgated thereunder and Multilateral Instrument 52-110 for members of public company audit
committees; and (b) set forth in the NYSE Standards, the Corporate Governance Guidelines of the
Toronto Stock Exchange, as proposed to be amended in April and November 2002 (Proposed TSX
Guidelines) and Multilateral Instrument 52-110 in respect of public company directors. The boards
also conducted a comprehensive assessment of each of their members as against these criteria and
determined that all current directors, except R.J. Ritchie, have no material relationship with the
Registrants and are independent and unrelated. Mr. Ritchie is not independent or unrelated by
virtue of the fact that he is the President and Chief Executive Officer of the Registrants. 3




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EXECUTIVE SESSIONS OF NON-MANAGEMENT DIRECTORS The Corporate Governance and Nominating Committees of the boards of the Registrants are
comprised of all the unrelated and independent directors on the boards and are required by their
terms of reference to meet at least quarterly and at such other times as they deem appropriate.
They are chaired by Mr. J.E. Newall. Interested parties may communicate directly with Mr. Newall
by writing to him at the following address, and all communications received at this address will be
forwarded to him: Office of the Corporate Secretary
Canadian Pacific Railway
Suite 920, 401  9th Avenue, S.W.
Calgary, Alberta
Canada
T2P 4Z4 AUDIT COMMITTEE FINANCIAL EXPERTS The following individuals comprise the entire membership of the Registrants Audit, Finance
and Risk Management Committees (Audit Committees), which have been established in accordance with
Section 3(a)(58)(A) of the Exchange Act: Stephen E. Bachand
     John E. Cleghorn
     M. Paquin
     Roger Phillips
     Michael W. Wright Each of the aforementioned directors, except Ms. Paquin, has been determined by the boards of
the Registrants to meet the audit committee financial expert criteria prescribed by the Securities
and Exchange Commission and has been designated as an audit committee financial expert for the
Audit Committees of the boards of both Registrants. Each of the aforementioned directors has also
been determined by the boards of the Registrants to be independent within the criteria referred to
above under the subheading Director Independence. FINANCIAL LITERACY OF AUDIT COMMITTEE MEMBERS The boards of the Registrants have determined that all members of the Audit Committees have
accounting or related financial management expertise within the meaning of the NYSE Standards and
accounting or related financial experience within the meaning of the Proposed TSX Guidelines.
The boards have also adopted the definition of financial literacy contained in the practice notes
of the Proposed TSX Guidelines and have determined that all members of the Audit Committees are
financially literate within that definition and as required by Multilateral Instrument 52-110 and
the NYSE Standards. SERVICE ON OTHER PUBLIC COMPANY AUDIT COMMITTEES John E. Cleghorn serves on two public company audit committees, in addition to the Audit
Committees of the two Registrants. Each Registrants board has determined that no director who
serves on more than two public company audit committees other than its own Audit Committee shall be
eligible to serve as a member of the Audit Committee of that Registrant, unless that Registrants
board determines that such simultaneous service would not impair the ability of such member to
effectively serve on that Registrants Audit Committee. 4




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The boards of the Registrants have determined that the service of Mr. Cleghorn on the audit
committees of two public companies other than the two Registrants does not impair his ability to
effectively serve on the Audit Committees of the Registrants, for the following reasons:  
    Two of the public company audit committees on which Mr. Cleghorn serves are the Audit
Committees of the Registrants. As Canadian Pacific Railway Company is a wholly-owned
subsidiary of Canadian Pacific Railway Limited, and the latter company carries on no
business operations and has no assets or liabilities of more than nominal value beyond its
100% shareholding in Canadian Pacific Railway Company, the workload of the Audit Committees
is essentially equivalent to the workload of one public company audit committee;
    The two public companies other than the Registrants on whose audit committees Mr.
Cleghorn serves have a holding company/operating company relationship similar to that
between the Registrants. Consequently, the workload involved in such audit committees is
essentially equivalent to the workload of one public company audit committee; and
    Mr. Cleghorn is a retired chief executive officer of a large public company and
qualifies, and has been designated as, an audit committee financial expert for the
Registrants. As a result, he no longer has any day-to-day executive or managerial
responsibilities and, in addition, brings to his role on the Audit Committees of the
Registrants considerable business experience and a highly-focused and effective approach to
audit-related matters. PRINCIPAL ACCOUNTING FEES AND SERVICES  INDEPENDENT AUDITORS Fees payable to the Registrants independent auditor, PricewaterhouseCoopers, LLP for the
years ended December 31, 2004, and December 31, 2003, totaled $1,898,000 and $1,501,000,
respectively, as detailed in the following table: Year ended December 31, 2004
    
    
    Year ended December 31, 2003Audit Fees
    
    
    $
    1,005,000
    
    
    
    $
    855,000Audit-Related Fees
    
    
    $
    543,000
    
    
    
    $
    329,000Tax Fees
    
    
    $
    350,000
    
    
    
    $
    310,000All Other Fees
    
    
    $
    0
    
    
    
    $
    7,000TOTAL
    
    
    $
    1,898,000
    
    
    
    $
    1,501,000
 The nature of the services provided by PricewaterhouseCoopers LLP under each of the categories
indicated in the table is described below. Audit Fees Audit fees were for professional services rendered by PricewaterhouseCoopers LLP for the audit of
the Registrants annual financial statements and services provided in connection with statutory and
regulatory filings or engagements. Audit-Related Fees Audit-related fees were for assurance and related services reasonably related to the performance of
the audit or review of the annual statements and are not reported under Audit Fees above. These
services consisted of: special attest services as required by various government entities;
accounting consultations and special audits in connection with acquisitions; the audit of financial
statements of certain subsidiaries and of various pension and benefits plans of the Registrants;
assistance with prospectus filings; access fees for technical accounting database resources; and
assistance with preparations for compliance with section 404 of the Sarbanes-Oxley Act of 2002. 5




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Tax Fees Tax fees were for tax compliance, tax advice and tax planning professional services. These
services consisted of: tax compliance including the review of tax returns; assistance with
questions regarding tax audits, the preparation of employee tax returns under the Registrants
expatriate tax services program and assistance in completing routine tax schedules and
calculations; tax planning and advisory services relating to common forms of domestic and
international taxation (i.e. income tax, capital tax, goods and services tax, and valued added
tax); and access fees for taxation database resources. All Other Fees Fees disclosed under this category were for products and services other than those described under
Audit Fees, Audit-Related Fees and Tax Fees above. In 2004, there were no services in the
category, and in 2003, these services consisted of assistance in reviewing an agreement and
proposed transaction. PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES PROVIDED BY
INDEPENDENT AUDITORS The Audit Committees have adopted a written policy governing the pre-approval of audit and
non-audit services to be provided to the Registrants by their independent auditors. The policy is
renewed annually and the audit and non-audit services to be provided to the Registrants by their
independent auditors, as well as the budgeted amounts for such services, are pre-approved at that
time. A report of all such services performed or to be performed by the independent auditors
pursuant to the policy must be submitted to the Audit Committees by the Vice-President and
Comptroller at least quarterly. Any additional audit or non-audit services to be provided by the
independent auditors either not included among the pre-approved services or exceeding the budgeted
amount for such pre-approved services by more than 10% must be individually pre-approved by the
Audit Committees or their Chairman, who must report all such additional pre-approvals to the Audit
Committees at their next meeting following the granting thereof. The independent auditors annual
audit services engagement terms and fees are subject to the specific pre-approval of the Audit
Committees. Non-audit services that the Registrants independent auditors are prohibited from
providing to the Registrants may not be pre-approved. In addition, prior to the granting of any
pre-approval, the Audit Committees or their Chairman, as the case may be, must be satisfied that
the performance of the services in question will not compromise the independence of the independent
auditors. Compliance with this policy is monitored by the Registrants Director, Internal Audit. OFF-BALANCE SHEET ARRANGEMENTS A description of the Registrants off-balance sheet arrangements is set forth on pages 29 and
30 of the Registrants 2004 Annual Report incorporated by reference and included herein. TABLE OF CONTRACTUAL COMMITMENTS The table setting forth the Registrants contractual commitments is set forth on page 30 of
the Registrants 2004 Annual Report incorporated by reference and included herein. 6




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UNDERTAKING AND CONSENT TO SERVICE OF PROCESS A.      Undertaking Each Registrant undertakes to make available, in person or by telephone, representatives to
respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so
by the Commission staff, information relating to: the securities registered pursuant to Form 40-F;
the securities in relation to which the obligation to file an annual report on Form 40-F arises; or
transactions in said securities. B.      Consent to Service of Process A Form F-X signed by Canadian Pacific Railway Limited and its agent for service of process was
filed with the Commission together with Canadian Pacific Railway Limiteds Annual Report on Form
40-F for the fiscal year ended December 31, 2000. A Form F-X signed by Canadian Pacific Railway
Company and its agent for service of process was filed with the Commission on April 21, 2004. SIGNATURES Pursuant to the requirements of the Exchange Act, each Registrant certifies that it meets all
of the requirements for filing on Form 40-F and has duly caused this Annual Report on Form 40-F to
be signed on its behalf by the undersigned, thereto duly authorized, in the City of Calgary,
Province of Alberta, Canada. CANADIAN PACIFIC RAILWAY LIMITED
CANADIAN PACIFIC RAILWAY COMPANY
(Registrants)Signed Robert V. HorteName: Robert V. Horte
Title: Corporate Secretary
Date: March 7, 2005 7




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DOCUMENTS FILED AS PART OF THIS REPORT  1.
    Annual Information Form of the Registrants for the year ended December 31, 2004.2.
    Annual Report of the Registrants for the year ended December 31, 2004, including Managements
Discussion and Analysis and Audited Consolidated Financial Statements of the Registrants as of
December 31, 2004 and for each of the three years then ended1. EXHIBITS  A.
    Consent of PricewaterhouseCoopers, Independent Accountants.B.
    Certifications by the Chief Executive Officer and Chief Financial Officer of the Registrants
pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.C.
    Certifications by the Chief Executive Officer and Chief Financial Officer of the Registrants
pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.   1
    For the purposes of this Annual Report on
Form 40-F, only pages 4 through 88 of the Registrants 2004 Annual Report
referred to above shall be deemed filed, and the balance of such 2004 Annual
Report, except as it may be otherwise specifically incorporated by reference in
the Registrants Annual Information Form, shall be deemed not filed with
the Securities and Exchange Commission as part of this Annual Report on Form
40-F under the Exchange Act. 8




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(AIF 2005 COVER PAGE)




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TABLE OF CONTENTS COVER PAGETABLE OF CONTENTSCORPORATE STRUCTUREName, Address and Incorporation Information
    
    
    3INTERCORPORATE RELATIONSHIPSPrincipal Subsidiaries
    
    
    4GENERAL DEVELOPMENT OF THE BUSINESSDevelopment of CPR
    
    
    5Strategy
    
    
    5Recent History
    
    
    6Performance Indicators
    
    
    6Network Efficiency
    
    
    7Franchise Renewal
    
    
    7Strengthening Business Fundamentals
    
    
    8Asset Maintenance Efficiency
    
    
    9Labour Productivity and Efficiency
    
    
    10North American Railway Franchise
    
    
    11Extending Franchise Reach
    
    
    11Railway Partnerships and Alliances
    
    
    12DESCRIPTION OF THE BUSINESSNetwork and Right of Way
    
    
    14Rolling Stock
    
    
    17Business Categories
    
    
    17Freight Revenues
    
    
    18Risk Factors
    
    
    21Safety
    
    
    23Competition
    
    
    23Border Security
    
    
    23Labour Relations
    
    
    23Environmental Protection
    
    
    24Regulation and Other Issues
    
    
    26Insurance
    
    
    27Related-party Transactions
    
    
    27SELECTED CONSOLIDATED FINANCIAL INFORMATIONSummary Financial Data
    
    
    28DIVIDENDSDeclared Dividends and Dividend Policy
    
    
    30CAPITAL STRUCTUREDescription of Capital Structure
    
    
    31Security Ratings
    
    
    33MARKET FOR SECURITIESStock Exchange Listings
    
    
    34Trading Price and Volume
    
    
    34DIRECTORS AND OFFICERSDirectors
    
    
    35Cease Trade Orders
    
    
    36Senior Officers
    
    
    36Shareholdings of Directors and Officers
    
    
    37LEGAL PROCEEDINGS
    
    
    38TRANSFER AGENTS AND REGISTRARSCPR Registrar and Transfer Agent
    
    
    39INTERESTS OF EXPERTS
    
    
    40ADDITIONAL INFORMATIONAdditional Company Information
    
    
    41
  *
    In this Annual Information Form (AIF), all dollar amounts are in Canadian dollars unless otherwise noted.Consent of PricewaterhouseCoopers, Independent AccountantsCertification of CEO and CFOCertification by CEO and CFO Pursuant to 18 U.S.C. Section 1350  2




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CORPORATE STRUCTURE   
 Name, Address and Incorporation Information Canadian Pacific Railway Limited (the Company or CPR) was incorporated on June 22, 2001, as
3913732 Canada Inc. pursuant to the Canada Business Corporations Act (the CBCA). On July 20,
2001, CPR amended its Articles of Incorporation to change its name to Canadian Pacific Railway
Limited. On October 1, 2001, Canadian Pacific Limited (CPL) completed an arrangement (the
Arrangement) whereby it distributed to its common shareholders all of the shares of newly-formed
corporations holding the assets of four of CPLs five primary operating divisions. The Arrangement
was effected as an arrangement pursuant to section 192 of the CBCA. On September 26, 2001, the
Arrangement was approved by the shareholders of CPL and Canadian Pacific Railway Company (CPRC),
previously a wholly-owned subsidiary of CPL, was transferred to CPR effective October 1, 2001. The
transfer was accomplished as part of a series of steps, pursuant to the terms of the Arrangement,
whereby CPL transferred all of its outstanding shares of CPRC to a CPL subsidiary, 3921760 Canada
Inc. (3921760). CPL then transferred all of its outstanding shares of 3921760 to CPR and CPR
amalgamated with 3921760.In this Annual Information Form, unless the context requires otherwise,
CPR and the Company refer to Canadian Pacific Railway Limited and, where applicable, its
subsidiaries, including CPRC. CPRs registered office, executive offices and principal place of business are located at Suite
500, 401  9th Avenue S.W., Calgary, Alberta T2P 4Z4. 3




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INTERCORPORATE RELATIONSHIPS   
 Principal Subsidiaries The table below sets out the Companys principal subsidiaries, including the jurisdiction of
incorporation and the percentage of voting and non-voting securities currently owned directly or
indirectly by the Company: Percentage ofnon-voting securitiesPercentage of voting
    
    
    beneficially owned, orIncorporated under the
    
    
    securities held
    
    
    over which control orPrincipal Subsidiary
    
    laws of
    
    
    directly or indirectly
    
    
    direction is exercisedCanadian Pacific Railway Company
    
    Canada
    
    
    100%
    
    
    Not applicable.Soo Line Corporation (1)
    
    Minnesota
    
    
    100%
    
    
    Not applicable.Soo Line Railroad Company (2)
    
    Minnesota
    
    
    100%
    
    
    Not applicable.Delaware and Hudson Railway Company,
Inc.(2)
    
    Delaware
    
    
    100%
    
    
    Not applicable.
  (1) Indirect wholly-owned subsidiary of Canadian Pacific Railway Company.(2) Wholly-owned subsidiary of Soo Line Corporation. 4




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GENERAL DEVELOPMENT OF THE BUSINESS   
 Development of CPR CPRC was incorporated by Letters Patent in 1881 pursuant to an Act of the Parliament of Canada.
CPRC is one of Canadas oldest corporations and was North Americas first transcontinental railway.
From its inception over 120 years ago, CPRC has developed into a fully-integrated and
technologically-advanced Class 1 railway (a railroad earning revenues of US$258.5 million annually)
providing rail and intermodal freight transportation services over a 13,800-mile network serving
the principal business centres of Canada, the U.S. Midwest and the U.S. Northeast. Of the total mileage operated by CPR, approximately 6,850 miles are located in western Canada,
2,200 miles in eastern Canada, 3,250 miles in the U.S. Midwest and 1,500 miles in the U.S.
Northeast. CPR owns 9,500 miles of track and an additional 4,300 miles of track are jointly owned,
leased or operated under trackage rights. CPRs business is based on funnelling traffic from network feeders and connectors, carrying railway
traffic to and from the main rail lines, onto a 4,700-mile high-density, high-quality railway
network. CPR has extended its network reach by establishing alliances and connections with other
major Class 1 railways in North America, which allows CPR to provide competitive product offerings
and access to markets across North America and, via the Port of Montreal, Quebec, and the Port of
Vancouver, British Columbia (B.C.), to markets in Europe and the Pacific Rim, respectively. CPRs network accesses the U.S. market directly through two wholly-owned subsidiaries: Soo Line
Railroad Company (Soo Line), a Class 1 railway operating in the U.S. Midwest; and Delaware and
Hudson Railway Company, Inc. (D&H), which operates between eastern Canada and major U.S.
Northeast markets including New York City, New York; Philadelphia, Pennsylvania; and Washington,
D.C. 
 Strategy CPRs goals are to become the preferred business partner for rail-based transportation services in
North America and to be at the forefront of the railway industry in operating profitability and
return on capital employed. Its principal strategies to accomplish these goals include maximizing
the strengths of its North American railway franchise by operating a low-cost scheduled railway,
developing new products and services in cooperation with customers and partners, and extending the
reach of the franchise through marketing and operating partnerships, as well as agreements and
commercial arrangements with other railways and transport companies in North America. CPRs
overall marketing and sales activities within each of its lines of business are focused on targeted
growth, product efficiency and maximizing value from existing assets. 5




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GENERAL DEVELOPMENT OF THE BUSINESS   
 Recent History CPR focuses on franchise renewal, increasing network efficiency, asset maintenance efficiency and
asset utilization, train operations productivity and labour productivity. The following table
summarizes the effect of these strategies on a number of industry recognized performance
indicators: 
 Year ended December 31Performance Indicators
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Gross ton-miles (GTM) (millions)(1)
    
    
    236,451
    
    
    
    221,884
    
    
    
    209,596
    
    
    
    212,928
    
    
    
    211,946Revenue ton-miles (RTM) (millions)(2)
    
    
    123,627
    
    
    
    114,599
    
    
    
    107,689
    
    
    
    110,622
    
    
    
    110,409Train-miles (thousands)(3)
    
    
    41,344
    
    
    
    40,470
    
    
    
    38,299
    
    
    
    38,162
    
    
    
    39,120Average number of active employees(4)
    
    
    16,056
    
    
    
    16,126
    
    
    
    16,116
    
    
    
    16,987
    
    
    
    17,965Average train weights (tons)(5)
    
    
    5,719
    
    
    
    5,483
    
    
    
    5,473
    
    
    
    5,580
    
    
    
    5,418Traffic
density
(GTMs per mile of road operated, excluding
track on which CPR has haulage rights
(thousands))
    
    
    17,113
    
    
    
    16,023
    
    
    
    15,107
    
    
    
    15,326
    
    
    
    15,183Employee
productivity
(GTMs per average active employee (thousands))
    
    
    14,727
    
    
    
    13,759
    
    
    
    13,005
    
    
    
    12,535
    
    
    
    11,798Fuel
efficiency
(U.S. gallons of fuel per 1,000 GTMs)
    
    
    1.20
    
    
    
    1.24
    
    
    
    1.24
    
    
    
    1.25
    
    
    
    1.29Locomotive utilization
(GTMs per active locomotive per day (thousands))
    
    
    675
    
    
    
    664
    
    
    
    673
    
    
    
    681
    
    
    
    652Total operating expenses, before other
specified items, per GTM (cents)(6)
(7)
    
    
    1.32
    
    
    
    1.32
    
    
    
    1.35
    
    
    
    1.35
    
    
    
    1.33
  Notes:(1)
    
    Gross Ton-Miles of freight measure the movement of total train weight over one mile
in a year. The total train weight is comprised of the weight of the freight cars, their
contents and inactive locomotives.(2)
    
    Revenue ton-miles of freight measure the movement of a revenue-producing ton of
freight a distance of one mile.(3)
    
    Train-miles is a measure reflecting the distance traveled by the lead locomotive on
each train operating over CPRs track.(4)
    
    Average number of active employees is the average number of actively employed
workers for the period. The number of actively employed workers includes employees who are
taking vacation and statutory holidays and other forms of short-term paid leave, and excludes
individuals who have a continuing employment relationship with CPR but are not currently
working. This indicator is calculated by adding the monthly average employee counts for the
year and dividing this total by 12.(5)
    
    Average train weight is the result of dividing GTMs by train miles. It represents
the average total weight of all CPR trains operating over CPRs track and track on which CPR
has running rights.(6)
    
    The item total operating expenses, before other specified items does not have a
standardized meaning prescribed by Canadian generally accepted accounting principles (GAAP)
and, therefore, is unlikely to be comparable to similar measures of other companies. Other
specified items are described under the heading Selected Consolidated Financial Information
in this AIF and CPRs 2004 Managements Discussion and Analysis.(7)
    
    Expenses for all prior years presented were restated to reflect the implementation
of a new accounting standard under Canadian GAAP for Asset Retirement Obligations. 6




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GENERAL DEVELOPMENT OF THE BUSINESS   
 Network Efficiency CPR continues to increase the capacity of its core franchise through infrastructure-sharing and
joint-service programs with other railways, strategic capital investment programs, and operating
plan strategies. Combined with the continued improvement of CPRs locomotive fleet, these
strategies enable CPR to achieve more predictable and fluid train operations between major
terminals. CPR has expanded its physical network with the following infrastructure-sharing and joint-service
programs:  
    CPR-CSX Transportation, Inc. (CSX) track connection at Detroit,
Michigan reduces transit times and improves consistency of service
between eastern Canada and the U.S. Midwest;
    CPR- UP provides joint service from western Canada to the U.S.
Pacific-Northwest, California and Arizona and to Texas/Mexico and
Kansas/Missouri; and
    CPR-Norfolk Southern Corporation joint intermodal service between
the Port of New York/New Jersey and eastern Canada reduces transit
times for import-export shippers. CPR constructed a new passing
siding at Clarks Summit, Pennsylvania and granted Norfolk Southern
Railway Company (NS) trackage rights between Sunbury,
Pennsylvania and Mechanicville, New York in order to increase
traffic and improve freight service to upstate New York, northern
Pennsylvania and New England. In 2002 and 2003, CPR spent approximately $25 million to extend the length of 16 rail sidings
throughout northern and eastern Ontario in order to increase operating efficiency and reduce costs.
A siding is a limited length of track parallel to the main line and linked to it at both ends by
switches, enabling trains running in either direction to pass each other. Longer sidings permit
the use of longer and fewer trains. It also permits fewer locomotives to be used to move the same
amount of freight in a given rail corridor. CPR has identified other corridor bottlenecks on its
network and a plan is in place to provide appropriate capacity in order to increase train density
and fluidity on all its major routes. Later in 2003, CPR sold a lower-density 12.6-km (7.8-mile)
rail line in northern New Brunswick known as the Edmunston Spur to Canadian National Railway
(CN). This line runs between Grand Falls and Cyr Junction, near St. Leonard, New Brunswick. CPR
also sold a 32.5-mile rail line that runs from Madison to Watertown, Wisconsin to the Wisconsin &
Southern Railroad. In 2004, CPR entered into a three-railway agreement with CN and NS to provide a significantly
shorter, more direct routing over D&H lines for NS-CN interline traffic moving between Eastern
Canada and the Eastern U.S. Under the agreement:  
    CN traffic destined for the Eastern U.S. will move in CPR trains
on D&Hs line between Rouses Point, New York, and Saratoga
Springs, New York, under a freight haulage arrangement between CPR
and NS;
    This CN traffic will then move in NS trains over D&Hs line
between Saratoga Springs and the NS connection near Harrisburg,
Pennsylvania, under trackage rights agreements between CPR and NS. The agreement generates one train per day of new business each direction, seven days a week on the
D&H. This arrangement is expected to improve traffic density and generate additional revenue. 
 Franchise Renewal Franchise renewal is an integral part of CPRs multi-year capital program. From 2002 to 2004 the
Company has invested approximately $1.9 billion in its core assets. CPRs annual average capital
spending is approximately 18% of revenues. However, funding of network maintenance programs may be
increased to ensure plant, property, and equipment assets are well maintained. CPRs annual program to modernize and upgrade its core strategic assets typically includes track
and facilities (including rail yards and intermodal terminals); locomotives; information
technology; and freight cars and other equipment investments. Over the three-year period from 2002
to 2004, CPR invested approximately $1.3 billion in track and facilities, about $217 million in
locomotives, and approximately $457 million in information technology, growth initiatives, freight
cars and other equipment. 7




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GENERAL DEVELOPMENT OF THE BUSINESS   Locomotive Fleet Modernization CPR has upgraded its locomotive fleet with the acquisition of high-adhesion alternating current
(AC) locomotives, which are more fuel efficient and reliable and have superior haulage capacity
relative to standard direct current (DC) locomotives. CPRs locomotive fleet now includes 582 AC
locomotives, representing approximately 52% of CPRs road-freight locomotive fleet, and handling
about 70% of CPRs workload. This investment has improved CPRs service reliability and has
produced cost savings in fuel, equipment rents and maintenance. It has also allowed CPR to remove
from service 810 older locomotives and enabled CPR to more efficiently utilize its repair and
maintenance facilities. Railcar Fleet Modernization Starting in 1998, and continuing through 2004, CPR undertook a freight-car modernization program to
fully leverage its rail network and locomotive fleet. The programs general aim included the
following objectives:  1.
    increase the productivity and standardization of each car fleet;2.
    secure lower lease costs by reducing CPRs reliance on short-term leasing; and3.
    improve customer satisfaction through the introduction of higher-capacity cars. In 2003, CPR introduced its Intermodal Fleet Renewal (IFR) initiative in order to increase the
density of its intermodal trains and allow CPR to move more containers with fewer trains. In
connection with the implementation of the IFR initiative, 5,500 new double-stack, 53- and 40-foot
cars were introduced in 2003 and 2004. Freight cars owned and long-term leased 2004
    
    
    2003
    
    
    2002Covered Hoppers(1)
    
    
    26,200
    
    
    
    25,100
    
    
    
    23,200Open Tops
    
    
    5,400
    
    
    
    4,600
    
    
    
    5,500Box Cars
    
    
    6,100
    
    
    
    7,000
    
    
    
    7,800Gondolas
    
    
    2,900
    
    
    
    2,500
    
    
    
    2,500Flats
    
    
    3,000
    
    
    
    2,700
    
    
    
    2,000Automotive
    
    
    3,300
    
    
    
    3,100
    
    
    
    3,500Intermodal
    
    
    3,400
    
    
    
    2,600
    
    
    
    3,100Total
    
    
    50,300
    
    
    
    47,600
    
    
    
    47,600
 (1)
    
    includes 9,000 government cars.
 CPRs covered hopper car fleet consists of a mixture of owned and leased cars. A portion of the
fleet used for the export of grain is leased from the federal government of Canada, which has
indicated a desire to sell or otherwise dispose of its cars. The potential impact of this on CPRs
grain business cannot be ascertained until the governments decision is announced. However, CPR
has advocated for a process, in the event of a disposition, that is market driven and open to all
interested parties. 
 Strengthening Business Fundamentals Yield Management CPR believes that its customers, many of whom compete in global markets, demand competitively
priced transportation service. In order to offer competitive prices to its customers, CPR has
redesigned its train operations and terminal processes and is continually working at increasing
productivity through cost-reduction programs and improving asset utilization through initiatives
aimed at targeted growth, product efficiency and maximizing value from existing resources. CPR has
a Price and Yield management team to standardize price and yield business processes across the
Company. 8




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GENERAL DEVELOPMENT OF THE BUSINESS   Train Operations Productivity In 1999, CPR introduced a new operating plan to increase productivity, improve asset utilization
and enhance service quality for customers. This means CPR is running longer, heavier trains more
consistently to make connections and meet delivery commitments for less cost. Commencing December 2003, CPR became the first railway in Canada to operate intermodal freight
trains with mid-train remote-control (Locotrol) locomotives. These remote-control units enable CPR
to run intermodal trains approaching three kilometres in length, which is particularly helpful in
winter weather. CPR extended the area of its Locotrol operation to encompass Moose Jaw,
Saskatchewan to Toronto, Ontario and extended the use of Locotrol from exclusively bulk train
operation to intermodal and mixed-manifest trains. 
 Asset Maintenance Efficiency CPR has improved the efficiency of its repair facilities primarily through outsourcing arrangements
and by reducing the costs of maintenance. CPR has improved the reliability of its locomotive fleet
by entering into warranty service agreements with suppliers pursuant to which suppliers have made
strict performance commitments. In May 2002, CPR closed its Frog Shop in Lethbridge, Alberta. The shop produced second-hand frogs
(a track component that allows trains to cross from one adjacent track to another) for use on CPRs
network. In January 2003, coinciding with the purchase of 46 new AC locomotives, CPR announced an
expansion of its warranty service agreements in eastern Canada, pursuant to which diesel locomotive
manufacturers manage the ongoing servicing of CPR locomotives using CPR employees. Commencing in 2004, CPR became the first Canadian railway to use a programmable linear unloading
system (PLUS) train, a high-speed and highly efficient system for spreading new ballast to
maintain the integrity of track roadbed. Ballast, made up of cleaned crushed rock, is the solid
foundation that ensures tracks are able to handle modern trains. PLUS reduces both the time
required for ballast spreading and the disruption of train operations. CPR expects to achieve a
10% saving on ballast expense in 2005 as a result of using this system. Information Technology As a 24-hour-a-day, 7-day-a-week business, CPR relies heavily on its computer systems to schedule
all components of its operations. Computer applications map out complex interconnections of
freight cars, locomotives, facilities, track and train crews to meet more than 10,000 individual
customer service commitments every day. CPR uses intricate automated traffic-forecasting systems,
determines car routings and yard workloads using bypass and circuitry analysis software, and
generates time-distance diagrams to examine track capacity. CPR has substantially completed the implementation of a suite of new operating systems,
collectively referred to as Service Excellence. This investment in information technology has
assisted CPR in becoming a scheduled railway operation, by helping increase the productivity of
CPRs asset base and improving customer service. The final step in the Service Excellence program
was the implementation of the TYES software program in 2004, with rollout to a few remaining yards
in Eastern Canada and the U.S. in 2005. The TYES application is a rail-yard management system that
manages shipment connections from train-to-train. CPR is currently investing in a new application called TRIEX that will improve the efficiency and
customer-service capabilities in its intermodal business. CPR is developing TRIEX in co-operation
with a U.S.-based software firm. The Company expects TRIEX will be installed in 2005. CPR is also
updating its train-control system by moving it to a more current technological platform, thereby
extending the life of this critical system by many years in line with the overall strategy of
optimizing assets. In late 2003, a transfer of assets to IBM Canada Ltd. was part of a seven-year, $200-million
agreement reached with IBM to operate and enhance CPRs computer infrastructure. The transition of
CPRs data centre to IBMs ownership and facility was completed in late 2004. CPR expects that
this arrangement will reduce its costs over time and allow remaining information technology staff
to focus on applications that improve efficiency and service. 9




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GENERAL DEVELOPMENT OF THE BUSINESS   Integrated Operating Plan In May 1999, CPR launched its scheduled railway Integrated Operating Plan (IOP). Under the IOP,
trains are scheduled to run consistently and at times agreed upon by CPR and the customer, thereby
ensuring connections at intermediate terminals are made and delivery commitments are met. A plan is
established for each rail car covering its entire trip from point of origin to final destination.
Cars with similar destinations are consolidated into blocks, thus reducing delays at intermediate
locations by simplifying processes for employees, eliminating the duplication of work and helping
to ensure fluid rail yards and terminals. These efficiencies help reduce transit times for
shipments throughout CPRs network and increase car availability for customers. Since the
implementation of the IOP, CPR has improved on-time performance of its premium intermodal train
services and has increased terminal performance for its customers while delivering a significant
reduction in the cost base of its operations. CPR now operates a scheduled railway and strives to deliver high service quality to its customers
and achieve a high level of efficiency through improved asset utilization. CPR is committed to
further pursuing methods to improve the scheduling of trains with other railways and to develop
systems designed to share advanced information, thereby improving service. In 2003, CPRs approach
to scheduled-railway operations won the Franz Edelman Award for Achievement in Operations Research
and the Management Sciences. In 2004, CPR, consistent with its IOP philosophy, phased in a rail capacity allocation system to
better manage growth in the import container business on Canadas west coast. CPR has experienced
an increase in traffic volumes as a result of this new system and believes the implementation of
this system moderates traffic flow and avoids the significant surges that create congestion in the
supply chain. Under the new system, CPR allocates to each of the shipping lines it serves an annual
import container volume through the Port of Vancouver gateway based on past volumes and growth
projections. CPR supplies sufficient railcars to meet the allocated volume. Intermodal terminal
operators commit to quick turnaround of railcars to maximize car availability. 
 Labour Productivity and Efficiency CPR continually takes steps to improve the effectiveness of its organizational structure in order
to increase its productivity and efficiency. Since 1996, the Company has centralized its management
team to improve communication and decision-making, simplified the organizations management
structure, and increased the responsibility given to management personnel. CPR regularly reviews
its organizational processes, workforce needs and related organizational costs, with a focus on
improving the productivity and efficiency of its workforce while reducing expenses. For example,
CPR eliminated approximately 1,900 permanent positions in 2000 (representing approximately 10% of
its workforce), including positions in management, administration, maintenance shops, train
operations and track maintenance. In 2001, CPR launched further cost-reduction initiatives, including the integration of the St.
Lawrence & Hudson Railway Company Limited (previously a CPR subsidiary operating in eastern
Canada), which resulted in the elimination of approximately 800 positions. In addition,
approximately 600 positions were transferred to service suppliers, who improved utilization of CPR
facilities through access to a larger customer base. During 2002, CPR began new restructuring initiatives to reduce costs by eliminating an additional
85 positions. In the second quarter of 2003, CPR began a productivity program that planned to
eliminate 820 positions by the end of 2005 through consolidation of administrative functions,
applications of new information technology to improve the productivity of administrative functions
and yard operations, and improvements in car and locomotive maintenance efficiency. The Company
eliminated 656 positions under this program as of the end of 2004. In order to stimulate and reward employee participation in CPRs efficiency initiatives, CPR has
implemented a number of incentive-based compensation programs designed to allow eligible employees,
both unionized and non-unionized, to share in the profits they help generate for CPR. 10




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GENERAL DEVELOPMENT OF THE BUSINESS   
 North American Railway Franchise CPR believes it is well positioned to achieve its goals because of its network and assets, its
emphasis on customer service and its team of dedicated employees. Network and Assets The competitive strengths of CPRs network and assets include the following:  
    CPR offers access to U.S. markets through 11 major interchanges and agreements and commercial arrangements with other
Class 1 railways;
    CPR handles the largest volume of intermodal containers through the Port of Montreal, a major North American gateway
for European trade;
    CPR has competitive access to new, state-of-the-art facilities at the Port of Vancouver, a major shipping gateway to
and from Pacific Rim markets;
    CPR offers the shortest rail route from the Port of Vancouver to the Chicago, Illinois rail hub;
    CPR has made significant investments in efficient AC locomotives; and
    CPR has invested strategically in new computer operating systems, enabling CPR to operate more effectively and
efficiently for the benefit of its customers while further enhancing its scheduled-railway operations. Customer-Oriented Initiatives CPR believes that its emphasis on customer service has
differentiated the Company from its competitors and has allowed its customers to compete
effectively in their respective markets, while permitting CPR to retain and enhance its customer
base. Some of CPRs customer-oriented initiatives include the following:  
    CPR has extended its rail lines directly to the new facilities of some of its key customers;
    CPR has introduced services and acquired assets that are custom-designed for certain of its key customers;
    CPRs service quality has helped to motivate several of its significant intermodal customers to locate large
distribution centres adjacent to CPRs intermodal terminals (for example, Sears, Canadian Tire and Consolidated
Fastfrate); and
    CPR has achieved a strong market position across a diversified base of customers and products through its
cross-functional approach. Dedicated Employees CPR considers its team of employees to be its most valued asset. Through
results-sharing programs, CPRs employees receive financial incentives for helping CPR attain its
goals. 
 Extending Franchise Reach CPR aims to continue to increase revenue through initiatives designed to extend its business beyond
the physical railway network, thereby providing the flexibility needed to capture market share from
its competitors. CPR plans to extend its franchise reach by creating new markets and by
concentrating on providing new products, expanded truck-rail transfer facilities and improved,
value-added service through customer-relationship management. New Product Offerings CPR works with its customers to develop and introduce new products into the marketplace. For
example, CPR introduced its Trans-Pacific initiative, a highly-efficient, freight-transportation
service between the Port of Vancouver and Chicago for import-export intermodal containers. By
working with the Port of Vancouver and various shipping lines to establish Vancouver, B.C., as the
preferred port for North America-bound deliveries from the Pacific Rim, CPR has created a
competitive route for the movement of containers into the Chicago market. CPR continues to secure
long-term agreements with customers in this corridor including OOCL, COSCO, China Shipping, NYK,
Columbus Lines and Lykes Lines Limited LLC, which are among, or are affiliated with, the worlds
largest container shipping companies. 11




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GENERAL DEVELOPMENT OF THE BUSINESS   Expanded Truck-Rail Transfer Facilities
CPR has also extended its franchise reach through the use of truck-rail transfer facilities, which
it uses to gain competitive access to key resource production areas not directly served by the CPR
network. This service will be provided through the Companys logistics and supply chain division,
Canadian Pacific Logistics Solutions (CPLS). Customer Relationship Management CPRs customer service team, located in Winnipeg, Manitoba; Calgary, Alberta; and Minneapolis,
Minnesota, aims to provide value to customers through the use of technology, a formalized
cross-functional approach to problem solving and the development of new opportunities for
customers. CPRs customer service group also includes a damage-prevention team, which works with
customers to ensure proper loading techniques are employed thereby enabling shipments to arrive in
good condition. CPR has put in place a Customer Relationship Management (CRM) program directed at understanding
and anticipating the needs of its current and potential customers. This program has better
positioned CPR to:  
    understand customer needs and expectations;
    deliver the expected product quality;
    work with customers to generate new product ideas;
    manage and improve the overall customer experience with CPR; and
    continuously improve CPRs performance. CPR will continue to build on this success through strengthened customer relationships and an
increased focus on sustainable growth opportunities. 
 Railway Partnerships and Alliances In order for certain customers to transport their goods from their desired points of origin to
their desired final destination points, goods may have to travel on more than one railway.
Transfers of goods from railway to railway can cause delays and service interruptions. CPRs rail
network connects to other North American rail carriers and CPR, in partnership continues to
co-develop processes and products designed to provide seamless and efficient scheduled train
service to these customers. Recent Class 1 railway initiatives include:  
    a joint CPR-UP service from western Canada to the U.S. Pacific-Northwest, California and Arizona via Kingsgate, B.C.;
    a joint CPR-UP service from western Canada to the Texas/Mexico and Kansas/Missouri markets via Minneapolis;
    a joint CPR-NS intermodal service between the Port of New York/New Jersey and eastern Canada;
    CPR-NS trackage-rights agreement to handle NS traffic over CPRs D&H lines in the U.S. Northeast; and
    a joint CPR-UP service from eastern Canada to the U.S. Gulf Coast and Mexico. CPR also works with smaller (short-line or non-Class 1) railways to develop partnerships that
benefit both parties. 12




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GENERAL DEVELOPMENT OF THE BUSINESS   In November 2004, CPR reached agreements with CN on three network initiatives that will improve
railway transit times and asset utilization in B.C., Alberta and Ontario. These agreements provide for:  
    A slot-sharing arrangement allowing CPR to operate eight
trains a week containing bulk commodities over CNs line
between Edmonton, Alberta and CPRs network at Coho, B.C.,
near Kamloops, B.C., a distance of about 550 miles. Under
the arrangement, trains are equipped with CPR locomotives
and operated by CN crews. At Coho, CPR trains enter
already-established directional running trackage that
permits all westbound trains of both railways to operate
through the B.C. Fraser Valley on CNs line and all
eastbound trains to operate on CPRs line.
    Directional running over about 100 miles of parallel CPR
and CN track in Ontario between Waterfall, which is near
Sudbury, and Parry Sound. The two railways have agreed to
operate eastbound trains over CNs line and westbound
trains over CPRs line, improving network fluidity in this
corridor. Implementation is expected in the second half
of 2005.
    A haulage arrangement pursuant to which CPR will transport
CN freight moving over about 300 miles of CPR track in
Ontario between Thunder Bay and a junction with CN at
Franz, Ontario using CPRs route north of Lake Superior.
This arrangement is expected to be implemented in the
second half of 2005. 13




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DESCRIPTION OF THE BUSINESS   
 Network and Right of Way CPRs 13,800-mile network extends from the Port of Vancouver in Canadas west to the Port of
Montreal in Canadas east, and to the U.S. industrial centres of Chicago; Newark, New Jersey,
Philadelphia; Washington, D.C.; New York City and Buffalo, New York. (CPR MAP) CPRs network is composed of four primary corridors: the Western, the Southern, the Central, and
the Eastern corridors. These corridors are comprised of main lines, totalling approximately 4,700
miles, supported by feeder lines that carry traffic to and from the main lines. The Western Corridor: Vancouver-Moose Jaw Overview The Western Corridor links Vancouver with Moose Jaw, the western Canadian terminus of
both CPRs Southern and Central corridors. With service through Calgary, this corridor provides the
shortest rail route for most bulk products transported from western Canada to the Port of
Vancouver. The Western Corridor is also an important part of CPRs highly-competitive service
routes between Vancouver and the U.S. Midwest and between Vancouver and central and eastern Canada. Products The Western Corridor is CPRs primary route for bulk and resource-products traffic from
western Canada to the Port of Vancouver for export. CPR also handles significant volumes of
import/export intermodal containers and domestic general merchandise
traffic. Feeder Lines CPR supports its Western Corridor with three significant feeder lines. The Coal
Route links the southeastern B.C. coal deposits to the Western Corridor and to the Roberts Bank
terminal at the Port of Vancouver. The Calgary-Edmonton Route provides rail access to central
Albertas petrochemical industries, natural resources markets and Edmonton. The Pacific Can-Am
Route connects Calgary and Medicine Hat, Alberta with the UP at Kingsgate, B.C. Connections CPRs Western Corridor connects with UP at Kingsgate, B.C. The Western Corridor also
connects with Burlington Northern and Santa Fe Railway (BNSF) at Coutts, Alberta, and at New
Westminster and Huntingdon, B.C. Yards and Repair Facilities CPR supports rail operations on the Western Corridor with major rail
yards at Vancouver, Calgary, Edmonton and Moose Jaw. CPR also has significant intermodal terminals
at Vancouver, Calgary and Edmonton, and locomotive and rail car repair facilities at Vancouver,
Golden, Calgary and Moose Jaw. 14




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DESCRIPTION OF THE BUSINESS   Other  The Western Corridor includes the 9.8-mile Mount Macdonald tunnel, which reduces the ruling
grade for loaded westbound trains to 1%, through the mountains of B.C. The Southern Corridor: Moose Jaw-Chicago Overview CPRs Southern Corridor connects with the Western Corridor at Moose Jaw. By running
through the twin cities of Minneapolis and St. Paul, Minnesota and Milwaukee, Wisconsin, south to
Chicago, CPR provides a direct, single-carrier route between western Canada and the U.S. Midwest. Products Primary traffic categories served on the Southern Corridor include intermodal containers
originated at the Port of Vancouver, Canadian fertilizers, chemicals, grain, coal, automotive and
U.S. agricultural products. Feeder Lines CPR supports the Southern Corridor with a significant feeder line connecting
Glenwood, Minnesota and Winnipeg. This line is both a gathering network for U.S. grain and a route
for Canadian fertilizers and merchandise traffic destined to the U.S. CPR has operating rights over the BNSF line between Minneapolis and the twin ports of Duluth,
Minnesota and Superior, Wisconsin (Duluth/Superior). This line provides an outlet for grain from
the U.S. Midwest to the grain terminals at Duluth/Superior. CPR has a route from Chicago to Louisville, Kentucky through a combination of operating rights and
owned lines. CPR handles general merchandise traffic on this route, as well as a significant amount
of coal traffic from mines in southern Indiana. Connections CPRs Southern Corridor connects with all major railways at Chicago. Outside of
Chicago, CPR has major connections with BNSF at Minneapolis and at Minot, North Dakota; with UP at
St. Paul; and with CSX and NS at Louisville. CPR also links its Southern Corridor to several
shortline railways that primarily serve grain and coal producing areas in the U.S. Yards and Repair Facilities CPR supports rail operations on the Southern Corridor with major rail
yards at Chicago, St. Paul and Glenwood. At Chicago, CPR also owns 49 % of the Indiana Harbor Belt
Railroad Company, a switching railway serving Greater Chicago and northwest Indiana. CPR has two
significant intermodal terminals at Chicago and one at Minneapolis. In addition, CPR has a major
locomotive repair facility at St. Paul and car repair facilities at St. Paul and Chicago. The Central Corridor: Moose Jaw-Toronto Overview The Central Corridor extends from Moose Jaw, through Winnipeg to its eastern terminus at
Toronto, Ontario. CPR complements the Central Corridor with a secondary route that is leased and
operated by Ottawa Valley Railway that connects Sudbury and Smiths Falls, Ontario and expedites the
movement of CPR traffic between Montreal and western Canada. CPRs Central Corridor provides
shippers direct rail service from Toronto and Montreal to Calgary and Vancouver via CPRs Western
Corridor. This is a key element of CPRs transcontinental intermodal and other competitive
services. The Central Corridor also provides access to the Port of Thunder Bay, Ontario, Canadas
primary Great Lakes bulk terminal. Products Major traffic categories on the Central Corridor include Canadian grain, coal, forest
and industrial products, intermodal containers, automotive products and general merchandise. Feeder Lines CPR supports the Central Corridor with a significant feeder line connecting Edmonton
with Winnipeg, through Saskatoon and Regina, Saskatchewan. This line is an important collector of
Canadian grain and fertilizer. Connections  The Central Corridor connects with BNSF at Emerson, Manitoba, as well as a number of
shortline railways. Yards and Repair Facilities CPR supports its rail operations on the Central Corridor with major
rail yards at Saskatoon, Winnipeg, Thunder Bay and Toronto. CPRs intermodal facility in the
northern Toronto suburb of Vaughan is CPRs largest intermodal facility, and serves the Greater
Toronto and southwestern Ontario area. CPR also operates intermodal terminals at Thunder Bay,
Winnipeg, Saskatoon and Regina. CPR has significant locomotive repair facilities at Winnipeg and Toronto and has car repair
facilities at Winnipeg, Thunder Bay and Toronto. 15




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DESCRIPTION OF THE BUSINESS   The Eastern Corridor Overview The Eastern Corridor provides CPR with an important link between the major population
centres of eastern Canada, the U.S. Midwest and the U.S. Northeast. The Eastern Corridor supports
CPRs leading market position at the Port of Montreal by providing one of the shortest rail routes
for European cargo destined to the U.S. Midwest. The Eastern Corridor consists of a route that is
owned and maintained by CPR between Montreal and Detroit, coupled with a trackage rights
arrangement (starting in 2005) with NS over the shortest rail route between Detroit and Chicago,
and a long-term rail car haulage contract with CSX that links Detroit with CPR-owned infrastructure
at Chicago. Products Over the Eastern Corridor, CPR predominantly handles intermodal containers, automotive,
forest and industrial products, as well as motor-carrier trailers on CPRs fast roll-on/roll-off
Expressway service. Feeder Lines The Eastern Corridor connects with a number of important feeder lines. The route
between Montreal and Sunbury in combination with trackage rights over other railways, provides CPR
direct access to New York City, New York; Albany, New York; Philadelphia, Newark, and Washington,
D.C. The line between Guelph Junction, Ontario and Binghamton, New York, including haulage rights
over the NS lines, links the southern Ontario industrial region with key U.S. connecting rail
carriers at Buffalo, and with the Montreal-to-Sunbury line at Binghamton. Connections The Eastern Corridor connects with all major railways at Chicago. We have major
connections with NS at Detroit, Buffalo, and at Harrisburg and Allentown, Pennsylvania. CPR also
has major connections with CSX located at Detroit, Buffalo, Albany, Washington D.C., and
Philadelphia. Yards and Repair Facilities In addition to yards and terminals at Toronto and Chicago, CPR
supports its Eastern Corridor with major rail yards at Montreal and Binghamton. CPR also has
intermodal facilities at Montreal and Detroit, as well as a second intermodal facility in Toronto
dedicated to serving the Eastern Corridor. CPR has Expressway terminals at Montreal and Toronto
(Milton and Agincourt). In addition to repair facilities in Toronto and Chicago, CPR has
locomotive and car repair facilities in Montreal and Binghamton. Other On June 30, 2004 CPR announced a restructuring of the D&H whereby D&H and NS will provide
yard and haulage services for each other, which restructuring is expected to reduce D&Hs costs and
provide new income. The changes resulting from the D&H-NS arrangement are discussed further under
the heading Network Efficiency in this AIF. The first set of changes was implemented in November
2004, and the remainder of the changes are expected to be implemented by the second quarter of
2005. The expected 2005 changes are subject to approval by the U.S. Surface Transportation Board
(STB). Right of Way CPRs rail network is standard gauge, which is used by all of the major railways in Canada, the
U.S. and Mexico. Continuous welded rail is used on over 96% of CPRs mainline. Virtually all of the
network and primary feeder trackage is 100-pound rail or heavier, suitable for movements of
286,000-pound cars, the North American rail industrys preferred car size. CPR uses different train control systems on different portions of its owned track, depending on the
volume of rail traffic. Centralized traffic control (CTC) signals are used to authorize the
movement of trains where traffic is heaviest. Approximately 3,450 miles of the network are
controlled with CTC signals. Where rail traffic is lightest, train movements are directed by written instructions transmitted
electronically and by radio from rail traffic controllers to train crews. In areas of intermediate
traffic density, CPR uses an automatic block signalling system (ABS) in conjunction with the
written instructions from rail traffic controllers. Approximately 700 miles of the network have
ABS in place. 16




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DESCRIPTION OF THE BUSINESS   
 Rolling Stock The following table summarizes the locomotive fleet owned or leased by CPR, including the age
distribution of the locomotive fleet: Number of Locomotives
(owned and leased) Road Freight
    
    
    Road
    
    
    YardAge in Years
    
    AC
    
    
    DC
    
    
    Switcher
    
    
    Switcher
    
    
    Total0-5
    
    
    268
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2686-10
    
    
    314
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31411-15
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    2116-20
    
    
    
    
    
    
    95
    
    
    
    94
    
    
    
    8
    
    
    
    197Over 20
    
    
    
    
    
    
    426
    
    
    
    175
    
    
    
    252
    
    
    
    853Totals
    
    
    582
    
    
    
    542
    
    
    
    269
    
    
    
    260
    
    
    
    1,653
 In addition to its locomotive fleet, CPR owns or leases approximately 50,300 freight cars, of which
approximately 23,100 cars are owned by CPR and 9,000 of which are hopper cars owned by Canadian
federal- or provincial-government agencies. Long-term leases on approximately 4,200 cars are
scheduled to expire during 2005, and the leases on approximately 13,900 additional cars are
scheduled to expire before the end of 2008. 
 Business Categories CPR provides the shortest rail route for most bulk products transported from western Canada to the
Port of Vancouver. CPR also provides highly competitive service routes between Vancouver and the
U.S. Midwest and between Vancouver and the major population centres in central and eastern Canada.
The CPR network provides a strategic link between the Port of Montreal and the U.S. Midwest. CPR
also serves the major eastern population centres of Montreal, Toronto, Newark, New York City,
Buffalo, Philadelphia and Washington, D.C. The following table compares the percentage of CPRs total freight revenue derived from each of its
major business lines in 2004 versus 2002. CPRs business balance has evolved to meet the needs of
its customers and growth in the intermodal market. Business Category
    
    2004
    
    
    2002Bulk
    
    
    44
    %
    
    
    43
    %Merchandise
    
    
    28
    %
    
    
    32
    %Intermodal
    
    
    28
    %
    
    
    25
    %
 17




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DESCRIPTION OF THE BUSINESS   
 Freight The following table
summarizes CPRs freight revenues since 2002. Fiscal
    
    
    
    
    
    
    Fiscal
    
    
    
    
    
    
    Fiscal2004
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    2002Freight Revenues
    
    
    
    
    
    Growth
    
    
    
    
    
    
    Growth
    
    
    
    
    
    
    Growth(in $ millions, except for
    
    
    
    
    
    Rate as
    
    
    
    
    
    
    Rate as
    
    
    
    
    
    
    Rate aspercentages)
    
    
    
    
    
    Compared
    
    
    
    
    
    
    Compared
    
    
    
    
    
    
    ComparedFiscal
    
    
    to Fiscal
    
    
    Fiscal
    
    
    to Fiscal
    
    
    Fiscal
    
    
    to FiscalBusiness Category
    
    2004
    
    
    2003
    
    
    2003
    
    
    2002
    
    
    2002
    
    
    2001BulkGrain
    
    
    668
    
    
    
    3.7
    %
    
    
    644
    
    
    
    2.1
    %
    
    
    631
    
    
    
    (15.8
    )%Coal
    
    
    530
    
    
    
    19.4
    %
    
    
    444
    
    
    
    0.2
    %
    
    
    443
    
    
    
    (6.5
    )%Sulphur and
fertilizers
    
    
    460
    
    
    
    10.0
    %
    
    
    418
    
    
    
    4.2
    %
    
    
    401
    
    
    
    5.2
    %Total bulk
    
    
    1,658
    
    
    
    10.1
    %
    
    
    1,506
    
    
    
    2.1
    %
    
    
    1,475
    
    
    
    (8.0
    )%MerchandiseForest products
    
    
    322
    
    
    
    (2.1
    )%
    
    
    329
    
    
    
    (8.6
    )%
    
    
    360
    
    
    
    1.7
    %Industrial
products
    
    
    430
    
    
    
    7.5
    %
    
    
    400
    
    
    
    (5.2
    )%
    
    
    422
    
    
    
    (2.0
    )%Automotive
    
    
    289
    
    
    
    (4.9
    )%
    
    
    304
    
    
    
    (8.7
    )%
    
    
    333
    
    
    
    9.5
    %Total merchandise
    
    
    1,041
    
    
    
    0.8
    %
    
    
    1,033
    
    
    
    (7.4
    )%
    
    
    1,115
    
    
    
    2.4
    %Intermodal
    
    
    1,030
    
    
    
    9.6
    %
    
    
    940
    
    
    
    6.6
    %
    
    
    882
    
    
    
    9.7
    %Total freight revenues
    
    
    3,729
    
    
    
    7.2
    %
    
    
    3,479
    
    
    
    0.2
    %
    
    
    3,472
    
    
    
    (0.7
    )%
 Bulk CPRs bulk business, comprised of grain, coal, sulphur and fertilizers, represented approximately
44% of total freight revenues in 2004. CPR provides bulk transportation services along the shortest
routes from major production areas in British Columbia, Alberta and Saskatchewan to the Port of
Vancouver. Grain CPRs grain business comprised approximately 18% of total freight revenues in 2004. The grain moved by CPR consists of whole grains, primarily wheat, barley and canola, and processed
products such as canola meal, vegetable oil and flour. CPRs network provides grain producers throughout North America with access to domestic and export
markets. CPR has direct access to the ports of Vancouver, Thunder Bay, Montreal, and
Duluth/Superior. Through its relationships with other railways, CPR also provides access to major
ports in both Canada and the U.S. CPRs revenues from Canadian export grain movements are subject to the Canada Transportation Act,
which includes a revenue formula. The revenue formula is indexed annually to reflect changes in the
input costs associated with moving grain destined for export. CPR has introduced a variety of products, including multi-car block incentives and car order
fulfillment products, which encourage more efficient grain movements. 18




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DESCRIPTION OF THE BUSINESS   Coal CPRs coal businesses represented approximately 14% of total freight revenues in 2004. In Canada,
CPR transports metallurgical coal from mines in southeastern B.C. to port terminals for export to
world markets, particularly the Pacific Rim. The mines located on CPRs lines, some of the most
efficient in North America, produce high-quality coal and have long-life reserves. The U.S. coal
business handled by CPR consists mainly of thermal coal and petroleum coke, transported mainly
within the U.S. Midwest. Elk Valley Coal Corporation (EVCC) Coal shipper Elk Valley Coal Corporation (EVCC), pursuant to the rules of the Canadian
Transportation Agency (CTA), referred the matter of rates and services for the transportation by
CPR of coal from EVCCs Elkview mine in southeastern B.C. to the Port of Vancouver to an
independent arbitrator. Notwithstanding that CPR maintains that this matter is governed by a
confidential contract, which CPR claims governs the movement of coal from all five of EVCCs mines
in southeastern BC, the arbitrator ruled in CPRs favour. In a closely related matter, CPR has
filed a statement of claim against EVCC in respect of all five mines for failure to pay applicable
rail freight charges in accordance with the confidential contract. In January 2005, EVCC and CPR
agreed to suspend all legal proceedings and entered into non-binding mediation in an attempt to
resolve all disputes between the parties. The disputes are not expected to affect the continued
shipment of coal by CPR from EVCCs mines. The outcome of this matter could have a material impact
on CPRs revenues and financial position. Sulphur and Fertilizers Sulphur and fertilizers business represented approximately 12% of total freight revenues in 2004. Sulphur Sulphur is a by-product of the oil and gas industry, primarily used in the production of phosphate
fertilizers. CPR provides rail transportation services from the key production facilities in
Canada to the U.S. and offshore markets  mainly China, Australia, and South Africa  via the Port
of Vancouver. Fertilizers The two main segments of the fertilizer business are potash and chemical fertilizers. CPRs potash
business moves primarily from Saskatchewan to markets in the U.S. and offshore countries through
the ports of Vancouver, Thunder Bay, and Portland, Oregon. Chemical fertilizers are transported to
Canadian and northern U.S. markets from key production areas in the Canadian Prairie provinces.
Phosphate fertilizer traffic is also received from U.S. railways. CPR has long-term,
inflation-protected contracts covering most of its fertilizer business. Merchandise CPRs merchandise business represented approximately 28% of total freight revenues in 2004.
Merchandise freight consists of finished vehicles and automotive parts, and forest and industrial
products. Merchandise cargo moves in various car types on mixed trains accommodating a robust
customer base across numerous traffic lanes. Significant volumes of merchandise traffic flows
through a network of truck- rail transload facilities managed through CPLS. This division has the
capability to offer logistics solutions to individual merchandise shippers. Automotive CPRs automotive business represented approximately 8% of total freight revenues in 2004. CPR
transports vehicles to and from several automotive plants in Ontario and automotive facilities
across the CPR network. Automotive business consists of the transportation of domestic and import
vehicles, automotive parts and agricultural equipment from North American assembly plants and the
Port of Vancouver to destinations in the Canadian and U.S. marketplace. 19




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DESCRIPTION OF THE BUSINESS   Forest Products CPRs forest products business represented approximately 9% of total freight revenues in 2004,
transporting a variety of forest products including wood pulp, lumber, newsprint, paper, panel
board and fibreboard. CPR mainly transports wood pulp from B.C. and eastern Canada, lumber from
B.C. and Alberta and newsprint from eastern Canada, primarily destined for the U.S. Industrial Products CPRs industrial products business represented approximately 11% of freight revenues in 2004. The
industrial products business line includes many input commodities, such as chemicals, plastics,
minerals, aggregates, metals, steel and scrap and energy-related products. Traffic moves within the
domestic North American market and to export markets in the Pacific Rim. Intermodal CPRs intermodal business accounted for approximately 28% of CPRs total freight revenues in fiscal
2004. This business line, which generally consists of high-value, time-sensitive shipments, has
grown significantly in recent years. CPR also believes that the intermodal business has attractive,
long-term growth prospects. To enhance competitiveness and prepare for continued growth, CPR has
increased capacity at its intermodal terminals in Vancouver, Calgary, Chicago, Toronto and
Montreal. CPR is also implementing new technology to provide better shipment tracking and an
improved overall service product to its customers. Import/Export Intermodal The international segment mainly handles containers of consumer goods between the ports of
Vancouver and Fraser Surrey, B.C., Montreal, New York and Philadelphia, and inland Canadian and
U.S. destinations. North American Intermodal North American intermodal traffic, transporting mainly retail goods, moves between Toronto,
Montreal, Chicago and several western Canadian cities. CPR has entered into co-location
initiatives, under which major retailers have built regional distribution facilities adjacent to
certain CPR intermodal terminals. Expressway CPRs Expressway provides high-quality rail services in the short-haul market. Expressway works in
partnership with the trucking industry by carrying standard, non-reinforced trailers between major
urban centres. A number of major motor carriers serving the automotive, resource, food and retail
sectors use CPRs Expressway. Canadian Pacific Logistics Solutions CPLS, a division of CPR, provides supply-chain consulting, logistics management, and facility
services, to rail and non-rail customers. Other Business CPR earns additional revenues through the sale or lease of its assets. These arrangements include
infrastructure and operating agreements with government-sponsored commuter rail authorities, the
sale of CPRs rights to lay fibre-optic cable along its track right-of-way and contracts with
passenger-service operators. CPR also operates the Royal Canadian Pacific, a luxury train
composed of CPRs historic business car fleet. Economic Dependence At December 31, 2004, one customer comprised 11.7% of total revenues and 12.4% of CPRs total
accounts receivable. At December 31, 2003 and 2002, no customers revenues were greater than 10%
of total freight revenues. 20




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DESCRIPTION OF THE BUSINESS   
 Risk Factors Competition The freight transportation industry is highly competitive. CPR faces intense competition for
freight transportation in Canada and the U.S., including competition from other railways and
trucking companies. Competition is based mainly on price, quality of service and access to
markets. Any improvement in the cost structure or service of CPRs competitors could increase this
competition and materially adversely affect the Companys business or operating results. In recent years there has been significant consolidation of the railway industry in North America.
The resulting larger railway companies are able to offer services in larger market areas and
compete with CPR in these markets. Competition from current and future competitors in the railway
industry could create a risk for CPRs competitive position and may materially adversely affect the
Companys business, financial condition or operating results. Economic and Other Conditions CPRs freight volumes and revenues are largely dependent upon the health of the North American and
global economy and other factors affecting the volumes and patterns of international trade. CPR
is also sensitive to factors such as weather, commodity pricing and global supply and demand, as
well as factors affecting North Americas agricultural, mining, forest products, consumer products,
import/export markets and automotive sectors. These factors are beyond the influence or control of
the railway industry generally and CPR specifically. Fuel Prices The Company is particularly dependent upon fuel costs which constitute a significant portion of
CPRs operating costs. Fuel prices and supplies are influenced significantly by international
political and economic circumstances. If a fuel shortage were to arise from OPEC production
curtailments, a disruption of oil imports or other factors, the resulting higher fuel prices could
materially affect CPRs operating results. Specifically, an increase in the price of fuel would
result in lower earnings and increased cash outflows. To manage this exposure to fluctuations in
fuel prices, as part of CPRs hedge policy, the Company sells or purchases crude oil futures. To
the extent that fuel costs decline below the levels specified in any such futures contracts, CPR
will not receive the full benefit of these contracts. Foreign Exchange Risk Although CPR conducts its business and receives revenues primarily in Canadian dollars, a
significant portion of CPRs revenues, expenses, assets and debt are denominated in U.S. dollars.
Thus, the Companys results are affected by fluctuations in the exchange rate between these
currencies. In addition, changes in the exchange rate between the Canadian dollar and other
currencies (including the U.S. dollar) make the goods transported by the Company more or less
competitive in the world marketplace and, in turn, positively or negatively affects the Companys
revenues and expenses. To manage this exposure to fluctuations in exchange rates between Canadian
and U.S. dollars on future revenue streams and certain U.S. dollar expenditures, CPR sells or
purchases forward U.S. dollars at fixed rates in future periods. To the extent that exchange rates
decline below the rate fixed by such futures contracts, the Company will not receive the full
benefit of these contracts. Regulatory Bodies CPRs railway operations in Canada are subject to regulations under the Canada Transportation Act
and the Railway Safety Actand certain other statutes administered by the Canadian Transportation
Agency and the Federal Minister of Transportation. U.S. railway operations are subject to
regulation administered by the STB and the Federal Railroad Administration (FRA). Other federal,
provincial, state and local regulations also govern the Companys railway operations, as well as a
variety of health, safety, labour, environmental and other matters. The Company is also subject to statutory and regulatory directives in the U.S. addressing homeland
security concerns. Future decisions by the U.S. government on homeland security matters or
decisions by the industry in response to security threats to the North American rail network could
materially adversely affect CPRs business or operating results. 21




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DESCRIPTION OF THE BUSINESS   Environmental Laws and Regulations The Companys operations and real estate assets are subject to extensive federal, provincial, state
and local environmental laws and regulations governing emissions to the air, discharges to waters
and the handling, storage, transportation and disposal of waste and other materials. CPR
transports hazardous materials and periodically uses hazardous materials in its operations. Any
allegations or findings to the effect that the Company has violated such laws or regulations could
materially affect business or operating results. In certain locations, CPR operates on properties that have been used for railways for over a
century. As a result, historic releases of hazardous waste or materials may be discovered,
requiring remediation of CPR properties or subjecting the Company to liability for damages, the
cost of which may be material. Changing regulations and remedial approaches in Canada and the U.S.
will ultimately impact the costs of remediation and overall environmental liability. The
regulatory tendency towards increased protection of human health from specific chemicals may mean
that sites that were previously remediated, or that did not require actions, could be subject to
further scrutiny. There is a possibility that an accidental release of hazardous waste or
materials on CPR properties could occur and the costs of remediation of properties affected by such
accidental release may be material. In the operation of a railway, it is possible that derailments or other accidents may occur that
could cause harm to human health or to the environment. As a result, the Company may incur costs
in the future to address any such harm, including costs relating to the performance of clean-ups,
natural resource damages and compensatory or punitive damages relating to harm to individuals or
property. Labour Relations Relations with CPR employees could deteriorate due to disputes related to, among other things, wage
or benefit levels or the Companys response to changes in government regulation of workers and the
workplace. CPRs operations rely heavily on its employees. Any labour shortage or stoppage caused
by poor relations with employees, including those represented by unions, could adversely affect
CPRs ability to provide services and the costs of providing such services, which could materially
harm business or operating results and materially harm relationships with CPRs customers. Certain of CPRs union agreements are currently under renegotiation, as discussed under the heading
Labour Relations in this AIF. The Company has no guarantee that these negotiations will be
resolved in a timely manner or on terms favourable to CPR. Pension Plans CPR maintains both defined benefit and defined contribution pension plans. With historic declines
in equity markets and current low interest rates, the plans unfunded liabilities have increased
significantly. Pension funding requirements are dependent upon various factors, including interest
rate levels, asset returns, regulatory requirements for funding purposes and changes to pension
plan benefits. In the absence of favourable changes to these factors, the Company may have to
satisfy the under-funded amounts of its plans through cash contributions from time to time. Indemnifications Pursuant to a trust and custodial services agreement between the Company and the trustee of the
Canadian Pacific Railway Company Pension Trust Fund, the Company has undertaken to indemnify and
save harmless the trustee, to the extent not paid by the Fund, from any and all taxes, claims,
liabilities, damages, costs and expenses arising out of the performance of the trustees
obligations under the agreement, except as a result of misconduct by the trustee. The indemnity
includes liabilities, costs or expenses relating to any legal reporting or notification obligations
of the trustee with respect to the defined contribution option of the pension plans or otherwise
with respect to the assets of the pension plans that are not part of the Fund. The indemnity
survives the termination or expiry of the agreement with respect to claims, liabilities, etc.,
arising prior to the termination or expiry. At December 31, 2004, the Company had not recorded a
liability associated with this indemnification, as the Company does not expect to make any payments
pertaining to it. Pursuant to the bylaws of CPR, all current and former directors and officers of the Company are
indemnified by the Company. CPR carries a directors and officers liability insurance policy
subject to a maximum coverage limit and certain deductibles in cases where a director or officer is
reimbursed by CPR for any loss covered by the policy. 22




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DESCRIPTION OF THE BUSINESS   
 Safety CPRs Safety and Health Management Committee provides ongoing focus, leadership, commitment and
support for efforts to improve the safety of CPRs operations, and the safety and health of CPR
employees. Safety Framework, the Companys safety management process, involves more than 1,000
employees in planning and implementing safety-related activities. This safety management process,
combined with a planning process that encompasses all operational functions, ensures a continuous
and consistent focus on safety. In 2004, FRA personal injuries per 200,000 employee hours (100 employee years in 2004) were 2.7,
down 13% from 2003 and down 25% since 2002. FRA reportable train accidents per million train miles
were 2.1 in 2004. This was a 17% increase compared to the previous two years, but was the same as
the frequency achieved in 2001. 
 Competition CPRs primary competitors for freight transportation in Canada and the U.S. include other railways
and trucking companies. CPR is subject to competition for freight traffic from other Class 1
railways, particularly BNSF, CN, NS, CSX and UP. Competition is based mainly on price, service and
accessibility to markets. Competition with the trucking industry is generally focused on freight
rates, flexibility of service and transit time performance. 
 Border Security In 2002, CPR became the first railway in North America to be approved under a new Canada Border
Services Agency (CBSA) program to streamline clearance at the border for imports from the U.S.
Under the Customs Self-Assessment (CSA) program, goods and shippers approved as low risk have a
virtual fast lane into Canada on CPR. Eligible goods include finished vehicles, parts for
vehicles, food products and other common items frequently imported from the U.S. The CSA program reduces the cost of compliance with Canadas import regulations. Under the
program, approved importers can file monthly summary customs reports on their shipments instead of
a report on each shipment. Approved importers also benefit from improved efficiencies, as their
goods can be delivered directly to their facilities without stopping for inspection at the border
or waiting for customs clearance. CPR benefits from improved freight car velocity, as shipments for
customers approved under CSA can move more easily across the U.S. border. CPR is also a certified carrier with the U.S. Customs and Border Protections (CBP) Customs
 Trade Partnership Against Terrorism (C-TPAT) program and the CBSAs Partners in Protection
(PIP) program. C-TPAT and PIP are partnership programs that seek to strengthen overall supply
chain and border security. Under the joint Declaration of Principles signed in April 2003, CPR committed to work with the CBSA
and CBP to install Vehicle and Cargo Inspection Systems (VACIS) at five of CPRs border
crossings. Rail VACIS systems use non-intrusive gamma ray technology to scan U.S.-bound rail
shipments. Four of the VACIS systems are now fully operational and CPR is currently working with
CBP and CBSA on the fifth installation in Windsor, Ontario, which is expected to be complete by
third-quarter 2005. The joint government-industry initiative to enhance the security of U.S.-bound
rail shipments ensures trade continues to flow between the two countries. These discussions were
part of the larger process of implementing the Smart Border Declaration adopted by Canada and the
U.S. in December 2001. 
 Labour Relations As at December 31, 2004, approximately 79% of CPRs workforce is unionized, with approximately 80%
of CPRs workforce located in Canada. Unionized employees are represented by a total of 36
bargaining agents. Seven bargaining agents represent CPR employees in Canada and the remaining 29
represent employees in CPRs U.S. operations. Labour Relations  Canada Agreements are currently in place with four of the seven bargaining units in Canada. Of the
collective agreements currently in effect, the two agreements with the Rail Canada Traffic
Controllers (RCTC) and the Canadian Pacific Police Association (CPPA) expire at the end of
2005, and the two agreements with the United Steel Workers of America (USWA) and the Teamsters
Canada Rail Conference  Running Trade Employees (TCRC-RTE) expire at the end of 2006. 23




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DESCRIPTION OF THE BUSINESS   A three-year collective agreement was ratified in January 2004 by members of the USWA. The
agreement with the USWA, which represents clerical employees of CPR, extends to the end of 2006 and
allows for wage increases for 2004, 2005 and 2006 of 3%, 2% and 2%, respectively. Train crew employees have elected the TCRC-RTE as their bargaining agent, replacing the Canadian
Council of Railway Operating Unions (CCROU). In January 2005, the TCRC-RTE ratified a four-year
agreement in effect until the end of 2006. The agreement allows for wage increases for 2003, 2004,
2005 and 2006 of 2%, 3%, 2.5%, and 3% respectively. It includes benefit plan, pension and
work-rule changes designed to contain costs and maximize value for employees. Track maintenance employees have elected the Teamsters Canada Rail Conference  Maintenance of Way
Division (TCRC-MWD) as their bargaining agent, replacing the Brotherhood of Maintenance of Way
Employees (BMWE). CPRs collective agreement with the BMWE expired on December 31, 2003. A
Memorandum of Settlement secured on January 14, 2005 is currently being voted upon by employees. CPRs collective agreement with the Canadian Auto Workers (CAW), which represent employees who
maintain and repair locomotives and freight cars, expired on December 31, 2004. A Memorandum of
Settlement for a three-year collective agreement extending to the end of 2007 was achieved on
February 11, 2005, and is being voted upon by employees. Negotiations commenced in September 2004 with the International Brotherhood of Electrical Workers
(IBEW), which represents signal maintainers. CPRs collective agreement with the IBEW expired at
the end of 2004. Negotiations are continuing. The Company is preparing for negotiations with the Rail Canada Traffic Controllers and the Canadian
Pacific Police Association that are scheduled to commence in September 2005. Labour Relations  U.S. CPR is party to collective agreements with 29 bargaining units in the U.S., including 15 bargaining
units representing employees of CPRs Soo Line and 14 bargaining units representing employees on
CPRs D&H. The U.S. Class 1 railroads negotiate collectively on a national basis and in the most recent
bargaining round that began in December 1999, three of the 13 unions have not yet settled. As of
December 31, 2004, a new round of bargaining opened for all 13 unions. Even though Soo Line and
D&H elect to negotiate independent of the national bargaining, the content and duration of the
national negotiations impact settlements on Soo Line and to a lesser extent on D&H. Soo Line Soo Line has renewed agreements with seven unions representing track maintainers, freight car
repair employees, clerks, train dispatchers, signal repair employees, machinists and conductors.
Tentative settlements have been reached with two other bargaining units, which represent
electricians and communication workers, and yard supervisors. Negotiations are continuing with the
six remaining bargaining units, which represent locomotive and car foremen, mechanical labourers,
blacksmiths and boilermakers, sheet metal workers, police, and locomotive engineers. Negotiations
with the Teamsters, representing locomotive engineers, are being assisted through mediation. D&H D&H has renewed agreements with five unions representing freight car repair employees, clerks,
locomotive engineers, signal repair employees and mechanical supervisors. Negotiations are
continuing with the remaining nine bargaining units, which represent track maintainers, conductors
and trainpersons, engineering supervisors, machinists, yard supervisors, electricians, labourers,
police, and pipefitters. 
 Environmental Protection CPR has implemented a comprehensive Environmental Management System (EMS), which uses the ISO
14001 standard five elements  policy, planning, implementation and operation, checking and
corrective action, and management review  as described briefly below. 24




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DESCRIPTION OF THE BUSINESS   Policy CPR has adopted an Environmental Protection Policy and continues to develop and implement policies
and procedures to address specific issues and facilitate the reduction of environmental risk. Each
policy is implemented with training for employees and a clear identification of roles and
responsibilities. CPR has been a Responsible CareÒ partner of the Canadian Chemical Producers Association since
1998. Responsible CareÒ is a chemical industry initiative that involves a public commitment
to continually improve the industrys environmental, health and safety performance. CPR
successfully completed its first Responsible CareÒ external verification in June 2002 and was
granted Responsible CareÒ practice-in-place status. Re-verification is scheduled for 2005. CPR has also been a partner of the American Chemistry Council since 1999. CPR is scheduled to be
verified for the first time in the U.S. by 2006. Planning CPR prepares an annual Corporate Environmental Plan that details CPRs work plan for the coming
year, including CPRs environmental goals and objectives, as well as high level strategies and
tactics. Various departments throughout the Company use the plan to integrate key corporate
environmental strategies into their own business plans. Implementation and Operation CPR has developed specific environmental programs to address areas such as air emissions,
wastewater, management of vegetation, chemicals and waste, storage tanks and fuelling facilities,
and environmental impact assessment. CPR environmental specialists and/or consultants lead these
programs. CPR continues to focus on preventing spills and other incidents that have a negative impact on the
environment. As a precaution, the Company has established a Strategic Emergency Response
Contractor network and located spill equipment kits across Canada and the U.S. to ensure a rapid
and efficient response in the event of an environmental incident. In addition, CPR regularly
updates and tests emergency preparedness and response plans. CPR has taken a proactive position to the remediation of historically impacted sites. In 1995, CPR
recorded a provision of $144 million, before tax, to cover anticipated expenditures on
environmental remediation programs. The Company re-evaluated its environmental liability needs in
1999 and as a result it increased expected remediation costs by $50 million, before tax. In 2004,
CPR recorded a $101 million charge to recognize environmental liabilities previously unknown.
Currently, the environmental accrual has been extended to 2014. Environmental Contamination In the fourth quarter of 2004, the Company recorded a $91-million charge for costs associated with
investigation, characterization, remediation and other applicable actions related to environmental
contamination at a property in Minnesota, which includes areas previously leased to third parties.
CPR is participating in the State of Minnesotas voluntary investigation and clean-up program at
the east side of the property. The property is the subject of ongoing fieldwork being undertaken
in conjunction with the appropriate State of Minnesota authorities to determine the extent and
magnitude of the contamination and the appropriate remediation plan. CPR now has sufficient
information to reasonably estimate clean-up and other applicable costs for the entire property.
CPR expects to file with the State of Minnesota in 2005 a response action plan for the east side of
the property. The charge was taken in the fourth quarter of 2004 because future liability increases for this
property became probable and reasonably estimable, in accordance with applicable accounting
standards, based on the present scientific and engineering knowledge about the property. The
estimate may change as new information becomes available or new developments occur. The costs are
expected to be incurred over approximately 10 years. CPR has initiated litigation against two former lessees that it believes are responsible for a
large portion of the contamination. Under applicable accounting rules, no recovery has been
accrued since any recovery is dependent upon the outcome of the lawsuit, which is at present
scheduled for trial in 2007. 25




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##### Table of Contents



DESCRIPTION OF THE BUSINESS   Checking and Corrective Action CPRs environmental audit program comprehensively, systematically and regularly assesses CPRs
facilities for compliance with legal requirements and conformance of CPRs policies to accepted
industry standards. Audit scheduling is determined through risk assessment for each facility.
Audits are led by third-party environmental audit specialists supported by CPR environmental staff. Audits are followed by a formal Corrective Action Planning process to ensure that findings are
addressed in a timely manner. Progress is monitored and reported quarterly to senior management
against corporate targets for completion. In 2004, as in the past three years, CPR achieved these
targets. Management Review CPRs Board of Directors has established an Environmental and Safety Committee that conducts a
semi-annual comprehensive review of environmental issues. An Environmental Lead Team, which is
comprised of senior leaders of Real Estate, Legal Services, Marketing and Sales, Finance,
Operations, Supply Services and Environmental Services, meets quarterly to review environmental
matters. Expenditures CPR spent approximately $37 million in 2004 for environmental management. Of this amount, $13
million was spent on ongoing operations, $2 million on capital program upgrades and $22 million
under the remediation program. Disposal of significant derailment wastes amounted to an additional
$1 million. 
 Regulation and Other Issues CPRs rail operations in Canada are subject to regulation of service, rate setting, network
rationalization and safety by the Canada Transportation Act, the Railway Safety Actand certain
other statutes. The Companys U.S. rail operations are subject to regulations administered by the
STB and the FRA. Canadian Regulation CPRs economic activities, including matters relating to rates, level of service obligations and
line discontinuance, are subject to the provisions of the Canada Transportation Act. The Canada Transportation Actcontains shipper rate and service protections, including final-offer
arbitration, competitive line rates, and compulsory interswitching (which allows a shipper to
request a railway to move its traffic to the nearest competitive interchange point with another
railway within a 30-kilometre radius for a regulated fee). However, to gain recourse to certain of
these protections, shippers must establish that they would suffer substantial commercial harm if
the relief sought were not granted. These shipper protections also extend to western Canadian grain
transportation. In 2000, the Minister of Transport (the Minister) initiated a review of the Canada Transportation
Actto assess whether it provides Canadians with an efficient, flexible and affordable
transportation system. The report of the panel appointed by the Minister to conduct the review was
released on July 18, 2001. The report acknowledged there is a significant level of competition
within the Canadian transportation industry, railways are entitled to adequate financial returns,
and railways have improved their productivity and returned these improvements to customers. In
addition, the panel recognized that the freight rail system works well for the vast majority of
users in most markets. On February 25, 2003, the federal government introduced a bill with miscellaneous changes to the
Canada Transportation Act. The bill did not become legislation. It is not known whether the
federal government will reintroduce the proposed changes in the current or any future Parliament. Pursuant to the Canada Transportation Act, CPR is subject to prescribed limits on revenue from
transporting western Canadian grain. Penalties may be imposed if these limits are exceeded. In
2004, CPR revenues for the movement of grain in western Canada exceeded the revenue cap by
approximately $322,000 on revenues of approximately $310 million (or 0.1%). The penalty levied
against CPR of approximately $16,000 has been paid to a grain research foundation for the benefit
of the western grain industry. 26




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##### Table of Contents



DESCRIPTION OF THE BUSINESS   Canadas federally-regulated railways are also subject to the Railway Safety Act, which governs
safety and operational aspects of the industry, as well as the Canadian Transportation Accident
Investigation and Safety Board Act. CPR is also subject to legislation relating to the environment
and the transportation of hazardous materials. Amendments to the Transportation of Dangerous Goods
regulations were enacted in August 2002. U.S. Regulation There have been efforts in recent years to re-regulate certain aspects of the U.S. rail industry
previously deregulated under the Staggers Rail Act of 1980. The rail industry opposes such
re-regulation. The STB regulates a variety of railway matters, including: service levels; certain freight car
rental payments; certain rail traffic rates; the terms under which railways may gain access to each
others facilities and traffic; mergers or acquisitions of railways and the abandonment, sale, and
discontinuance of operations on rail lines. In June 2001, the STB issued new regulations governing mergers and consolidation of Class 1
railways in the U.S. CPR believes these new regulations require applicants to demonstrate that a
proposed transaction would be in the public interest and would enhance competition where necessary
to offset any negative effects. The FRA governs all safety-related aspects of railway operations within the U.S. and, therefore,
has jurisdiction over CPR operations conducted within the U.S. State and local regulatory agencies
may also exercise jurisdiction over certain safety and operational matters of local significance. 
 Insurance CPR maintains insurance policies to protect its assets and to protect against liabilities. CPRs
insurance policies include, but are not limited to, liability insurance, directors and officers
liability insurance, automobile insurance and property insurance. The property insurance program
includes business interruption coverage which would respond in the event of catastrophic damage to
CPRs infrastructure. CPR believes that it has adequate insurance in place to protect the Company
from known and unknown liabilities. 
 Related-party Transactions In 2004, CPR provided no rail services to related parties. CPR entered into agreements with former affiliate CP Ships Ltd. (CP Ships), a related party of
CPR prior to completion of the Arrangement, for the transportation of CP Ships container rail
traffic through the ports of Montreal and Vancouver. The agreements provide for the use of CPR rail
services for all of CP Ships container rail traffic on specified routes to and from certain cities
in Canada and the U.S. The agreements with CP Ships were to expire on January 31, 2004. However,
the parties have entered into a new long-term agreement extending the arrangement to 2014. The
terms of the new agreement do not differ materially from those contained in the agreements entered
into prior to the completion of the Arrangement. CPR has entered into an agreement with former affiliate Fording Inc. (Fording), a related party
of CPR prior to completion of the Arrangement, for the transportation of all of the coal processed
at Fordings mines in B.C. to the Port of Vancouver. The term of the Fording agreement expires on
March 31, 2007. 27




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##### Table of Contents



SELECTED CONSOLIDATED FINANCIAL INFORMATION   The following table presents selected financial and operating information for CPR for the years
ended December 31, 2000 through 2004. 
 Summary Financial Data
    
    
2004
    
    
    
    2003(2)
    
    
    
    2002(2)
    
    
    
    2001(2)
    
    
    
    2000(2)INCOME STATEMENT DATA:
    
    
    (in millions, except per share data)Revenues
    
    
    $
    3,902.9
    
    
    
    $
    3,660.7
    
    
    
    $
    3,665.6
    
    
    
    $
    3,698.6
    
    
    
    $
    3,655.1Operating expenses, before other specified items(1)
    
    
    
    3,114.4
    
    
    
    
    2,931.1
    
    
    
    
    2,821.6
    
    
    
    
    2,870.5
    
    
    
    
    2,820.4Operating income, before other specified items(1)
    
    
    
    788.5
    
    
    
    
    729.6
    
    
    
    
    844.0
    
    
    
    
    828.1
    
    
    
    
    834.7Other charges, before spin-off bridge financing fees(1)
    
    
    
    36.1
    
    
    
    
    33.5
    
    
    
    
    21.8
    
    
    
    
    26.4
    
    
    
    
    21.0Interest expense
    
    
    
    218.6
    
    
    
    
    218.7
    
    
    
    
    242.2
    
    
    
    
    209.6
    
    
    
    
    167.0Income tax expense, before FX on LTD, income tax recovery and
income tax on other specified items(1)(3)
    
    
    
    172.4
    
    
    
    
    147.3
    
    
    
    
    181.2
    
    
    
    
    223.3
    
    
    
    
    242.4Income, before other specified items and FX on LTD(1)
    
    
    $
    361.4
    
    
    
    $
    330.1
    
    
    
    $
    398.8
    
    
    
    $
    368.8
    
    
    
    $
    404.3Foreign exchange gains (losses) on long-term debt (FX on
LTD)(3) (net of tax)
    
    
    
    94.4
    
    
    
    
    224.4
    
    
    
    
    16.7
    
    
    
    
    (48.2
    )
    
    
    
    (39.2
    )Other specified items:Loss on transfer of assets to outsourcing firm
    
    
    
    
    
    
    
    
    (28.9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restructuring, asset impairment and/or environmental charges
    
    
    
    (71.9
    )
    
    
    
    (215.1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    Spin-off related and incentive compensation charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24.5
    )
    
    
    
    Bridge financing fees related to spin-off
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17.2
    )
    
    
    
    Revaluation of future income taxes
    
    
    
    
    
    
    
    
    59.3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax rate change effect on future income tax liability
    
    
    
    
    
    
    
    
    (52.7
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income tax recovery
    
    
    
    
    
    
    
    
    
    
    
    
    
    72.0
    
    
    
    
    64.0
    
    
    
    
    131.7Income tax on other specified items
    
    
    
    29.1
    
    
    
    
    84.2
    
    
    
    
    
    
    
    
    
    18.1
    
    
    
    
    Net income(3)
    
    
    $
    413.0
    
    
    
    $
    401.3
    
    
    
    $
    487.5
    
    
    
    $
    361.0
    
    
    
    $
    496.8Basic earnings per share, before other specified items and FX on
LTD(1)(2)(3)
    
    
    $
    2.28
    
    
    
    $
    2.08
    
    
    
    $
    2.52
    
    
    
    $
    2.33
    
    
    
    $
    2.55Diluted earnings per share, before other specified items and FX
on LTD(1)(2)(3)
    
    
    $
    2.27
    
    
    
    $
    2.07
    
    
    
    $
    2.50
    
    
    
    $
    2.32
    
    
    
    $
    2.55Basic earnings per share(3)
    
    
    $
    2.60
    
    
    
    $
    2.53
    
    
    
    $
    3.08
    
    
    
    $
    2.28
    
    
    
    $
    3.14Diluted earnings per share(3)
    
    
    $
    2.60
    
    
    
    $
    2.52
    
    
    
    $
    3.06
    
    
    
    $
    2.27
    
    
    
    $
    3.13
  Notes:(1)
    
    Excludes other specified items which are described under the heading Other
Specified Items in CPRs 2004 Managements Discussion and Analysis. It should be noted that
CPRs operating results, before FX on LTD and other specified items, as described in this AIF,
have no standardized meanings prescribed by Canadian generally accepted accounting principles
(GAAP) and, therefore, are unlikely to be comparable to similar measures presented by other
companies.(2)
    
    Certain expenses for the years 2000 to 2003 were restated to reflect the
implementation of a new accounting standard under Canadian GAAP for Asset Retirement
Obligations. Earnings per share figures were also restated for these years to conform to this
new accounting standard.(3)
    
    Effective January 1, 2002, CPR was required to adopt retroactively, with
restatement, the new Canadian Institute of Chartered Accountants accounting standard for the
treatment of FX on LTD. Figures for 2001 and 2000 were restated to conform to this standard.(4)
    
    Return on capital employed (after taxes) is calculated as income, before other
specified items and FX on LTD, less interest expense, divided by average net-debt-plus-equity,
and multiplied by one minus CPRCs normalized tax rate for each respective period.(5)
    
    Net-debt to net-debt-plus-equity has been calculated by dividing total debt (being long-term
debt, including long-term debt maturing within one year, plus advances from affiliates) by
total capitalization (being total debt plus total shareholders equity). 28




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##### Table of Contents



SELECTED CONSOLIDATED FINANCIAL INFORMATION   Summary Financial Data
    
    
    2004

    
    
    2003(2)

    
    
    2002(2)

    
    
    2001(2)

    
    
    2000(2)BALANCE
SHEET DATA:Total assets(3)
    
    
    $
    10,499.8
    
    
    
    $
    9,956.7
    
    
    
    $
    9,664.3
    
    
    
    $
    9,675.5
    
    
    
    $
    8,681.9Long-term debt, before current portion
    
    
    $
    3,075.3
    
    
    
    $
    3,348.9
    
    
    
    $
    2,922.1
    
    
    
    $
    3,709.0
    
    
    
    $
    2,276.3Shareholders equity
    
    
    $
    3,982.4
    
    
    
    $
    3,654.6
    
    
    
    $
    3,368.3
    
    
    
    $
    2,962.8
    
    
    
    $
    3,436.3FINANCIAL
RATIOS:Operating ratio, before other specified items(1)(2)
    
    
    
    79.8
    %
    
    
    
    80.1
    %
    
    
    
    77.0
    %
    
    
    
    77.6
    %
    
    
    
    77.2
    %Annual return on capital employed (after taxes), before other
specified items and FX on LTD(4)
    
    
    
    7.3
    %
    
    
    
    7.2
    %
    
    
    
    9.0
    %
    
    
    
    8.5
    %
    
    
    
    9.4
    %Net-debt to net-debt-plus-equity(5)
    
    
    
    42.9
    %
    
    
    
    46.9
    %
    
    
    
    47.4
    %
    
    
    
    51.8
    %
    
    
    
    39.1
    %
  Notes:(1)
    
    Excludes other specified items which are described under the heading Other
Specified Items in CPRs 2004 Managements Discussion and Analysis. It should be noted that
CPRs operating results, before FX on LTD and other specified items, as described in this AIF,
have no standardized meanings prescribed by Canadian generally accepted accounting principles
(GAAP) and, therefore, are unlikely to be comparable to similar measures presented by other
companies.(2)
    
    Certain expenses for the years 2000 to 2003 were restated to reflect the
implementation of a new accounting standard under Canadian GAAP for Asset Retirement
Obligations. Earnings per share figures were also restated for these years to conform to this
new accounting standard.(3)
    
    Effective January 1, 2002, CPR was required to adopt retroactively, with
restatement, the new Canadian Institute of Chartered Accountants accounting standard for the
treatment of FX on LTD. Figures for 2001 and 2000 were restated to conform to this standard.(4)
    
    Return on capital employed (after taxes) is calculated as income, before other
specified items and FX on LTD, less interest expense, divided by average net-debt-plus-equity,
and multiplied by one minus CPRCs normalized tax rate for each respective period.(5)
    
    Net-debt to net-debt-plus-equity has been calculated by dividing total debt (being
long-term debt, including long-term debt maturing within one year, plus advances from
affiliates) by total capitalization (being total debt plus total shareholders equity). Reference is made to the factors affecting the comparability of the foregoing financial data
under the headings Summary of significant accounting policies and New accounting policies in
Notes 1 and 2, respectively, in the Notes to Consolidated Financial Statements included in the
Companys 2004 Annual Report. 29




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##### Table of Contents



DIVIDENDS   
 Declared Dividends and Dividend Policy The details of dividends declared by the Board of Directors since the initial listing of CPRs
Common Shares on the Toronto and New York stock exchanges in October 2001 are as follows: Dividend Amount
    
    
    Record Date
    
    
    Payment Date$0.1275
    
    
    December 27, 2001
    
    
    January 28, 2002$0.1275
    
    
    March 27, 2002
    
    
    April 29, 2002$0.1275
    
    
    June 27, 2002
    
    
    July 29, 2002$0.1275
    
    
    September 27, 2002
    
    
    October 28, 2002$0.1275
    
    
    December 27, 2002
    
    
    January 27, 2003$0.1275
    
    
    March 28, 2003
    
    
    April 28, 2003$0.1275
    
    
    June 27, 2003
    
    
    July 28, 2003$0.1275
    
    
    September 26, 2003
    
    
    October 27, 2003$0.1275
    
    
    December 24, 2003
    
    
    January 26, 2004$0.1275
    
    
    March 26, 2004
    
    
    April 26, 2004$0.1275
    
    
    June 25, 2004
    
    
    July 26, 2004$0.1325
    
    
    September 24, 2004
    
    
    October 25, 2004$0.1325
    
    
    December 31, 2004
    
    
    January 31, 2005$0.1325
    
    
    March 25, 2005
    
    
    April 25, 2005
 The Board of Directors will give consideration on a quarterly basis to the payment of future
dividends. The amount of any future quarterly dividends will be determined based on a number of
factors that may include the results of operations, financial condition, cash requirements and
future prospects of the Company. The Company is, however, under no obligation to declare dividends
and the declaration of dividends is wholly within the Board of Directors discretion. Further, the
Board of Directors may cease declaring dividends or may declare dividends in amounts that are
different from those previously declared. Lastly, restrictions in the credit or financing
agreements entered into by the Company or the provisions of applicable law may preclude the payment
of dividends in certain circumstances. 30




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##### Table of Contents



CAPITAL STRUCTURE   
 Description of Capital Structure The Company is authorized to issue an unlimited number of Common Shares, an unlimited number of
First Preferred Shares and an unlimited number of Second Preferred Shares.  1).
    The rights, privileges, restrictions and conditions attaching to the Common Shares are as
follows:  a).
    Payment of Dividends: The holders of the Common Shares will be entitled to
receive dividends if, as and when declared by CPRs Board of Directors out of the
assets of the Company properly applicable to the payment of dividends in such amounts
and payable in such manner as the Board may from time to time determine. Subject to
the rights of the holders of any other class of shares of the Company entitled to
receive dividends in priority to or rateably with the holders of the Common Shares, the
Board may in its sole discretion declare dividends of the Common Shares to the
exclusion of any other class of shares of the Company.b).
    Participation upon Liquidation, Dissolution or Winding Up: In the event of
the liquidation, dissolution or winding up of the Company or other distribution of
assets of the Company among its shareholders for the purpose of winding up its affairs,
the holders of the Common Shares will, subject to the rights of the holders of any
other class of shares of the Company entitled to receive the assets of the Company upon
such a distribution in priority to or rateably with the holders of the Common Shares,
be entitled to participate rateably in any distribution of the assets of the Company.c).
    Voting rights: The holders of the Common Shares will be entitled to receive
notice of and to attend all annual and special meetings of the shareholders of the
Company and to one (1) vote in respect of each Common Share held at all such meetings,
except at separate meetings of or on separate votes by the holders of another class or
series of shares of the Company.  2).
    The rights, privileges, restrictions and conditions attaching to the First Preferred Shares
are as follows:  a).
    Authority to Issue in One or More Series: The First Preferred Shares may at
any time or from time to time be issued in one (1) or more series. Subject to the
following provisions, the Board may by resolution fix from time to time before the
issue thereof the number of shares in, and determine the designation, rights,
privileges, restrictions and conditions attaching to the shares of, each series of
First Preferred Shares.b).
    Voting Rights: The holders of the First Preferred Shares will not be entitled
to receive notice of or to attend meeting of the shareholders of the Company and will
not be entitled to vote at any such meeting, except as may be required by law.c).
    Limitation on Issue: The Board may not issue any First Preferred Shares if by
so doing the aggregate amount payable to holders of First Preferred Shares as a return
of capital in the event of the liquidation, dissolution or winding up of the Company or
any other distribution of the assets of the Company among its shareholders for the
purpose of winding up its affairs would exceed $500,000,000.d).
    Ranking of First Preferred Shares: The First Preferred Shares will be
entitled to priority over the Second Preferred Shares and the Common Shares of the
Company and over any other shares ranking junior to the First Preferred Shares with
respect to the payment of dividends and the distributions of assets of the Company in
the event of any liquidation, dissolution or winding up of the Company or other
distribution of the assets of the Company among its shareholders for the purpose of
winding up its affairs.e).
    Dividends Preferential: Except with the consent in writing of the holders of
all outstanding First Preferred Shares, no dividend may be declared and paid on or set
apart for payment on the Second Preferred Shares or the Common Shares or on any other shares
ranking junior to the First Preferred Shares unless and until
all dividends (if any) up to and including any dividend payable for the last completed
period for which such dividend is payable on each series of First Preferred Shares
outstanding has been declared and paid or set apart for payment. 31




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##### Table of Contents



CAPITAL STRUCTURE    3).
    The rights, privileges, restrictions and conditions attaching to the Second Preferred
Shares are as following:  a).
    Authority to Issue in One or More Series: The Second Preferred Shares may at
any time or from time to time be issued in one (1) or more series. Subject to the
following provisions, the Board may by resolution fix from time to time before the
issue thereof the number of shares in, and determine the designation, rights,
privileges, restrictions and conditions attaching to the shares of, each series of
Second Preferred Shares.b).
    Voting Rights: The holders of the Second Preferred Shares will not be entitled
to receive notice of or to attend any meetings of the shareholders of the Company and
will not be entitled to vote at any such meeting, except as may be required by law.c).
    Limitation on Issue: The Board may not issue any second Preferred Shares if
by so doing the aggregate amount payable to holders of Second Preferred Shares as a
return of capital in the event of the liquidation, dissolution or winding up of the
Company or any other distribution of the assets of the Company among its shareholders
for the purpose of winding up its affairs would exceed $500,000,000.d).
    Ranking of Second Preferred Share: The Second Preferred Shares will be
entitled to priority over the Common Shares of the Company and over any other shares
ranking junior to the Second Preferred Shares with respect to the payment of dividends
and the distribution of assets of the Company in the event of the liquidation,
dissolution or winding up of the Company or any other distribution of the assets of the
Company among its shareholders for the purpose of winding up of its affairs.e).
    Dividend Preferential: Except with the consent in writing of the holders of
all outstanding Second Preferred Shares, no dividend may be declared and paid on or set
apart for payment on the Common Shares or on any other shares ranking junior to the
Second Preferred Shares unless and until all dividends (if any) up to and including any
dividend payable for the last completed period for which such dividend is payable on
each series of Second Preferred Shares outstanding has been declared and paid or set
apart for payment. 32




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##### Table of Contents



CAPITAL STRUCTURE   
 Security Ratings The Companys debt securities are rated annually by three approved rating organizations  Moodys
Investors Service, Standard & Poors and Dominion Bond Rating Service Limited. Currently CPRs
securities are rated as Investment Grade, as shown in the chart below: Approved Rating Organization
    
    
    Long Term DebtMoodys Investors Service
    
    
    Baa2Standard & Poors
    
    
    BBBDominion Bond Rating Service
    
    
    BBB
 Credit ratings are intended to provide investors with an independent measure of the credit quality
of an issue of securities and are indicators of the likelihood of payment and of the capacity and
willingness of a company to meet its financial commitment on an obligation in accordance with the
terms of the obligation. A description of the rating categories of each of the rating agencies in
the table above is set out below. Credit ratings are not recommendations to purchase, hold or sell securities and do not address the
market price or suitability of a specific security for a particular investor and may be subject to
revision or withdrawal at any time by the rating agencies. Credit ratings may not reflect the
potential impact of all risks on the value of securities. In addition, real or anticipated changes
in the rating assigned to a security will generally affect the market value of that security.
There can be no assurance that a rating will remain in effect for any given period of time or that
a rating will not be revised or withdrawn entirely by a rating agency in the future. (CHART) 33




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##### Table of Contents



MARKET FOR SECURITIES   
 Stock Exchange Listings The common shares of CPR are listed on the Toronto Stock Exchange and the New York Stock Exchange
under the symbol CP. 
 Trading Price and Volume The following chart provides the monthly trading information for CPR common shares on the Toronto
Stock Exchange during 2004. Opening
    
    
    
    High
    
    
    
    Low
    
    
    
    Closing
    
    
    
    Number of
    
    
    
    Volume ofPrice per
    
    
    
    Price per
    
    
    
    Price per
    
    
    
    Price per
    
    
    
    Trades
    
    
    
    SharesMonth
    
    
    Share ($)
    
    
    
    Share ($)
    
    
    
    Share ($)
    
    
    
    Share ($)
    
    
    
    Performed
    
    
    
    TradedJanuary
    
    
    
    36.59
    
    
    
    
    37.55
    
    
    
    
    34.30
    
    
    
    
    34.33
    
    
    
    
    15,648
    
    
    
    
    10,985,473February
    
    
    
    34.79
    
    
    
    
    35.22
    
    
    
    
    30.77
    
    
    
    
    31.50
    
    
    
    
    22,091
    
    
    
    
    15,210,160March
    
    
    
    31.55
    
    
    
    
    33.36
    
    
    
    
    30.32
    
    
    
    
    31.50
    
    
    
    
    26,895
    
    
    
    
    14,821,995April
    
    
    
    31.86
    
    
    
    
    32.95
    
    
    
    
    30.41
    
    
    
    
    30.50
    
    
    
    
    23,444
    
    
    
    
    14,312,109May
    
    
    
    30.70
    
    
    
    
    31.25
    
    
    
    
    29.36
    
    
    
    
    30.69
    
    
    
    
    17,271
    
    
    
    
    11,302,984June
    
    
    
    30.50
    
    
    
    
    33.10
    
    
    
    
    30.11
    
    
    
    
    32.75
    
    
    
    
    19,510
    
    
    
    
    15,047,047July
    
    
    
    32.51
    
    
    
    
    34.22
    
    
    
    
    31.70
    
    
    
    
    33.70
    
    
    
    
    15,161
    
    
    
    
    9,391,682August
    
    
    
    34.15
    
    
    
    
    34.19
    
    
    
    
    31.60
    
    
    
    
    33.37
    
    
    
    
    13,339
    
    
    
    
    6,565,897September
    
    
    
    33.20
    
    
    
    
    33.84
    
    
    
    
    31.71
    
    
    
    
    32.69
    
    
    
    
    13,413
    
    
    
    
    10,508,698October
    
    
    
    32.45
    
    
    
    
    34.80
    
    
    
    
    32.45
    
    
    
    
    34.41
    
    
    
    
    15,490
    
    
    
    
    13,840,085November
    
    
    
    34.31
    
    
    
    
    39.00
    
    
    
    
    34.02
    
    
    
    
    38.85
    
    
    
    
    27,436
    
    
    
    
    20,189,207December
    
    
    
    39.05
    
    
    
    
    41.55
    
    
    
    
    36.76
    
    
    
    
    41.10
    
    
    
    
    28,708
    
    
    
    
    20,577,814
 The following chart provides the monthly trading information for CPR common shares on the New York
Stock Exchange during 2004. Opening
    
    
    
    High
    
    
    
    Low
    
    
    
    Closing
    
    
    
    Number of
    
    
    
    Volume ofPrice per
    
    
    
    Price per
    
    
    
    Price per
    
    
    
    Price per
    
    
    
    Trades
    
    
    
    SharesMonth
    
    
    Share ($)
    
    
    
    Share ($)
    
    
    
    Share ($)
    
    
    
    Share ($)
    
    
    
    Performed
    
    
    
    TradedJanuary
    
    
    
    28.30
    
    
    
    
    29.13
    
    
    
    
    25.82
    
    
    
    
    25.95
    
    
    
    
    4,488
    
    
    
    
    1,478,700February
    
    
    
    25.90
    
    
    
    
    26.55
    
    
    
    
    23.10
    
    
    
    
    23.51
    
    
    
    
    5,858
    
    
    
    
    2,187,800March
    
    
    
    23.73
    
    
    
    
    25.23
    
    
    
    
    22.65
    
    
    
    
    24.18
    
    
    
    
    6,707
    
    
    
    
    2,449,500April
    
    
    
    24.19
    
    
    
    
    25.17
    
    
    
    
    22.14
    
    
    
    
    22.22
    
    
    
    
    6,540
    
    
    
    
    2,719,500May
    
    
    
    22.25
    
    
    
    
    22.85
    
    
    
    
    21.40
    
    
    
    
    22.39
    
    
    
    
    6,206
    
    
    
    
    2,463,100June
    
    
    
    22.25
    
    
    
    
    24.64
    
    
    
    
    22.04
    
    
    
    
    24.63
    
    
    
    
    7,206
    
    
    
    
    3,019,800July
    
    
    
    24.64
    
    
    
    
    25.81
    
    
    
    
    24.25
    
    
    
    
    25.47
    
    
    
    
    7,073
    
    
    
    
    2,662,500August
    
    
    
    25.47
    
    
    
    
    26.05
    
    
    
    
    23.83
    
    
    
    
    25.45
    
    
    
    
    6,300
    
    
    
    
    1,895,900September
    
    
    
    25.40
    
    
    
    
    26.25
    
    
    
    
    24.67
    
    
    
    
    25.78
    
    
    
    
    4,505
    
    
    
    
    1,185,200October
    
    
    
    25.85
    
    
    
    
    28.51
    
    
    
    
    25.58
    
    
    
    
    28.25
    
    
    
    
    5,802
    
    
    
    
    2,145,400November
    
    
    
    28.15
    
    
    
    
    32.85
    
    
    
    
    28.05
    
    
    
    
    32.74
    
    
    
    
    7,437
    
    
    
    
    2,883,900December
    
    
    
    33.05
    
    
    
    
    34.50
    
    
    
    
    29.77
    
    
    
    
    34.41
    
    
    
    
    11,837
    
    
    
    
    4,731,100
 34




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##### Table of Contents



DIRECTORS AND OFFICERS   The following are the names and municipalities of residence of the directors and officers of the
Company, their positions and principal occupations within the past five years, the period during
which each director has served as director of the Company, and the date on which each directors
term of office expires. 
 Directors Year of annualmeeting at whichterm of officePosition held and principal occupation
    
    expires (DirectorName and municipality of residence
    
    within the preceding five years(1)
    
    since)S.E. Bachand (2)(3)(5)
Ponte Vedra Beach, Florida, U.S.A.
    
    Retired President and Chief Executive
Officer, Canadian Tire Corporation, Limited
(hard goods retailer specializing in
automotive, sports and leisure and home
products)
    
    2005
(2001)J.E. Cleghorn, O.C., F.C.A. (2)(3)(6)
Toronto, Ontario, Canada
    
    Chairman, SNC-Lavalin Group Inc.,
(international engineering and construction
firm)
    
    2005
(2001)T.W. Faithfull (3)(4)(5)
Oxford, England
    
    Retired President and Chief Executive Officer
Shell Canada Limited (oil and gas company)
    
    2005
(2003)J.E. Newall, O.C.(3)
Calgary, Alberta, Canada
    
    Chairman, Canadian Pacific Railway Limited,
and NOVA Chemicals Corporation (chemicals
company producing styrenics, olefins and
polyolefin products)
    
    2005
(2001)Dr. J.R.
Nininger (3)(4)(5)
Ottawa, Ontario, Canada
    
    Retired President and Chief Executive
Officer, The Conference Board of Canada
(private not-for-profit research group)
    
    2005
(2001)M.
Paquin (2)(3)(4)
Montreal, Quebec, Canada
    
    President and Chief Executive Officer,
Logistec Corporation (international
cargo-handling company)
    
    2005
(2001)M.E.J. Phelps, O.C. (3)(4)(5)
West Vancouver, B.C., Canada
    
    Chairman, Dornoch Capital Inc. (private
investment company)
    
    2005
(2001)R.
Phillips, O.C. (2)(3)(6)
Regina, Saskatchewan, Canada
    
    Retired President and Chief Executive
Officer, IPSCO Inc. (steel manufacturing
company)
    
    2005
(2001)R.J. Ritchie
Calgary, Alberta, Canada
    
    President and Chief Executive Officer,
Canadian Pacific Railway Limited
    
    2005
(2001)M. W. Wright (2)(3)(5)
Longboat Key, Florida, U.S.A.
    
    Retired Chairman of the Board, SUPERVALU
INC. (food distributor and grocery retailer)
    
    2005
(2001)
   Notes:(1)
    
    S.E. Bachand was President and Chief Executive Officer of Canadian Tire Corporation,
Limited from March 1993 to August 2000. J.E. Cleghorn was Chairman and Chief Executive
Officer of the Royal Bank of Canada from January 1995 to July 2001. T.W. Faithfull was
President and Chief Executive Officer of Shell Canada Limited from April 1999 until July 2003.
Dr. J.R. Nininger was President and Chief Executive Officer of The Conference Board of Canada
from September 1978 to August 2001. M.E.J. Phelps was Chairman and Chief Executive Officer of
Westcoast Energy Inc. from June 1988 until March 2002. R. Phillips was President and Chief
Executive Officer of IPSCO, Inc. from 1982 until December 2001. R.J Ritchie became President
of Canadian Pacific Railway Company in July 1996 and continues to hold that position. M.W.
Wright was Chairman and Chief Executive Officer of SUPERVALU INC. from June 1981 until June
2001 and Chairman until June 2002.(2)
    
    Member of the Audit, Finance and Risk Management Committee.(3)
    
    Member of the Corporate Governance and Nominating Committee.(4)
    
    Member of the Environmental and Safety Committee.(5)
    
    Member of the Management Resources and Compensation Committee.(6)
    
    Member of the Pension Trust Fund Committee. 35




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DIRECTORS AND OFFICERS   
 Cease Trade Orders S.E. Bachand was a director of Krystal Bond Inc. when it was subject to a cease trade order on
April 12, 2002 for failure to file financial statements. It has since ceased to operate as a going
concern. J.E. Cleghorn, a director of Nortel Networks Corporation and Nortel Networks Limited is
subject to a cease trade order issued in May 2004, for failure to file certain financial
statements, by the Ontario Securities Commission against directors, officers and certain other
current and former employees of Nortel Networks prohibiting trading in Nortel Networks securities. 
 Senior Officers As at February 21, 2005, the following were executive officers of CPR: Principal occupation within theName and municipality of residence
    
    Position held
    
    preceding five yearsJ.E. Newall, O.C.
Calgary, Alberta, Canada
    
    Chairman
    
    Chairman, NOVA Chemicals
Corporation (chemicals company
producing styrenics, olefins
and polyolefin products)R.J.
Ritchie
Calgary, Alberta, Canada
    
    President and Chief
Executive Officer
    
    President and Chief Executive
Officer, Canadian Pacific
Railway CompanyM.T. Waites
Municipal District of RockyviewAlberta, Canada
    
    Executive Vice-President and Chief
Financial Officer
    
    Executive Vice-President and
Chief Financial Officer, Chief
Executive Officer, U.S.
Network, Canadian Pacific
Railway Company; Executive
Vice-President and Chief
Financial Officer, Canadian
Pacific Railway Company;
Vice-President and
Comptroller, Canadian Pacific
Railway CompanyF. Green
Calgary, Alberta, Canada
    
    Executive
Vice-President and
Chief Operating
Officer
    
    Executive Vice President and
Chief Operating Officer,
Canadian Pacific Railway
Company; Executive
Vice-President, Marketing and
Operations, Canadian Pacific
Railway Company; Senior
Vice-President, Marketing,
Canadian Pacific Railway
Company; Vice-President,
Marketing, Canadian Pacific
Railway CompanyW.P. Bell
Calgary, Alberta, Canada
    
    Vice-President,
Investor Relations
    
    Vice-President, Investor
Relations, Canadian Pacific
Railway Company;
Vice-President, 
E-Business,
Canadian Pacific Railway
Company; Vice-President,
Logistics Systems, Canadian
Pacific Railway CompanyP. Clark
Calgary, Alberta, Canada
    
    Vice-President,
Communications and
Public Affairs
    
    Vice-President, Communications
and Public Affairs, Canadian
Pacific Railway CompanyJ.J. Doolan
Municipal District of RockyviewAlberta, Canada
    
    Vice-President and
Treasurer
    
    Vice-President and Treasurer,
Canadian Pacific Railway
Company; Assistant Treasurer,
Canadian Pacific Railway
Limited and Canadian Pacific
Railway Company; President,
River Ridge Financial
Management Ltd. (financial
consulting and management
company)B. Grassby
Calgary, Alberta, Canada
    
    Vice-President and
Comptroller
    
    Vice-President and
Comptroller, Canadian Pacific
Railway Company;
Vice-President, Finance and
Secretary, Controller and
Assistant Secretary, CAE
Electronics Ltd. (hi-tech
electronics company)
 36




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DIRECTORS AND OFFICERS   Principal occupation within theName and municipality of residence
    
    Position held
    
    preceding five yearsP.A. Guthrie
Municipal District of RockyviewAlberta, Canada
    
    Vice-President, Law
    
    Vice-President, Law, Canadian
Pacific Railway Company;
Assistant Vice-President Legal
Services and General Counsel,
Canadian Pacific Railway
Company; Chief Regulatory
Counsel, Canadian Pacific
Railway CompanyR.V. Horte
Calgary, Alberta, Canada
    
    Corporate Secretary
    
    Corporate Secretary, Canadian
Pacific Railway Company;
Senior Assistant Corporate
Secretary, Canadian Pacific
Railway Limited and Canadian
Pacific Railway Company;
Assistant Corporate Secretary,
Canadian Pacific Railway
Limited and Canadian Pacific
Railway CompanyG.A. Feigel
Calgary, Alberta, Canada
    
    Assistant Corporate
Secretary
    
    Assistant Corporate Secretary,
Canadian Pacific Railway
Company; Assistant Corporate
Secretary, Canadian Pacific
LimitedC.
ConnollyMunicipal District of RockyviewAlberta, Canada
    
    Assistant Treasurer
    
    Assistant Treasurer, Capital
Markets, Canadian Pacific
Railway Limited and Canadian
Pacific Railway Company;
Director of Capital Markets,
Treasury, Canadian Pacific
Railway Company; Director of
Finance, Information Services,
Canadian Pacific Railway
Company; Executive Assistant
to the President & Chief
Executive Officer, Canadian
Pacific Railway Company
 
 Shareholdings of Directors and Officers As at December 31, 2004, the directors and senior officers, as a group, beneficially owned, either
directly or indirectly, or exercised control or direction over a total of 154,910 Common Shares of
CPR, representing 0.10% of the outstanding Common Shares as of that date. 37




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##### Table of Contents



LEGAL PROCEEDINGS   CPR is normally involved in various claims and litigation arising in the normal course of its
business. The following are the only significant legal proceedings currently in progress. Stoney Tribal Council v. Canada, EnCana and CPR The Stoney Tribal Council commenced a lawsuit on February 26, 1999, in Alberta Court of
Queens Bench against CPR and the Government of Canada. The lawsuit claims $150 million in
damages, primarily for alleged improper oil and gas extraction. The claim was later amended to add
PanCanadian Energy Corporation (now EnCana Corporation) as a defendant. CPR believes that it has
made adequate provision in its financial statements for this lawsuit. Derailment  Minot, North Dakota On January 18, 2002, a CPR train derailed adjacent to a residential neighbourhood immediately
west of Minot, North Dakota. Five derailed cars containing anhydrous ammonia ruptured and a vapour
plume covered the derailment site and surrounding area. One fatality and a large number of
personal injuries occurred. Immediately following the derailment CPR began a process of
environmental remediation at a cost in excess of $8 million. In addition, CPR has settled over
20,000 claims from residents of the Minot area relating to the derailment. A number of lawsuits
have been filed against various defendants, including CPR, in North Dakota and Minnesota, as well
as a class action lawsuit which has not yet been certified. CPR is working closely with its
insurers to defend these lawsuits. Three cases in Hennepin County (Minneapolis) have been set for
trial beginning in October 2005, while five other cases have been set for trial in January 2006.
CPR believes that it has made adequate provision in its financial statements for these lawsuits. 38




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TRANSFER AGENTS AND REGISTRARS   
 CPR Registrar and Transfer Agent Computershare Trust Company of Canada, with transfer facilities in Montreal, Toronto, Calgary and
Vancouver, serves as transfer agent and registrar for CPRs common shares in Canada. Computershare Trust Company of New York serves as co-transfer agent and co-registrar for CPRs
common shares in New York. Requests for information should be directed to: Computershare Trust Company of Canada
     Suite 700, 1500 University Street
     Montreal, Quebec, Canada
     H3A 3S8 39




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##### Table of Contents



INTERESTS OF EXPERTS   The Companys auditors, PricewaterhouseCoopers LLP, have prepared the Auditors Report to the
shareholders of Canadian Pacific Railway Limited. 40




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##### Table of Contents



ADDITIONAL INFORMATION   
 Additional Company Information Additional information about CPR is available on the Companys Website at www.cpr.ca, and on SEDAR
(System for Electronic Document Analysis and Retrieval) at www.sedar.com in Canada and on the U.S.
Securities Exchange Commissions Website (EDGAR) at www.sec.gov\edgar in the U.S. Additional information, including directors and officers remuneration and indebtedness, principal
holders of the Companys securities and securities authorized for issuance under equity
compensation plans, where applicable, is contained in the Companys information circular for its
most recent annual meeting of shareholders that involved the election of directors. Additional financial information is provided in the Companys Consolidated Financial Statements and
Managements Discussion and Analysis for its most recently completed financial year. 41




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##### Table of Contents



(CPR LOGO)  Suite 500 Gulf Canada Square
401  9th Avenue SW
Calgary Alberta T2P 4Z4 www.cpr.ca TSX/NYSE: CP  (RESPONSIBLE CARE LOGO)




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##### Table of Contents



(2004 ANNUAL REPORT COVER PAGE)




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##### Table of Contents



(OUR COMPANY) our company Canadian Pacific Railways 14,000-mile track network, ocean and Great Lakes port service,
cross-border gateways and extensive connections with other railways provide shippers with access to
fast-growing world markets and efficient reach into markets across North America, including major
business centres in Mexico. CPR aspires to be the most fluid railway in North America and intends to translate gains in
fluidity into operating leverage that will generate value for shareholders. Canadian Pacific Railway quickly expanded its inventory of co-operative arrangements with other
railways in 2004 to generate greater fluidity and more capacity in key areas of its network and to
increase traffic density and operating efficiencies on its track network in the northeastern United
States. The new arrangements include directional running, which turns the parallel tracks of two railways
into dedicated eastbound and westbound lanes, trackage rights, which give one railway authority to
operate its own trains over another railways track, haulage services, under which one railway
moves anothers trains, and enhanced freight interchange and improved access to terminals and
service areas.




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##### Table of Contents



(PHOTO OF TRAIN OVER BRIDGE) A CPR locomotive pulls a Norfolk Southern Railway locomotive and freight over the Nicholson
Viaduct near Scranton, Pa. CPR entered into a series of co-operative arrangements with Norfolk
Southern in 2004. The new arrangements have increased traffic density and revenue and reduced costs
on CPRs network in the northeastern U.S.




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##### Table of Contents



01
    
    chairmans 2004 letter
    
    16
    
    performance indicators
    
    29
    
    off-balance sheet
    
    42
    
    managements responsibilityto shareholders
    
    18
    
    operating expenses,
    
    
    
    arrangements
    
    
    
    for financial reporting02
    
    presidents 2004 letter
    
    
    
    before other specified items
    
    30
    
    contractual commitments
    
    43
    
    auditors reportto shareholders
    
    19
    
    other income statement items
    
    31
    
    foreign exchange
    
    44
    
    consolidated financial04
    
    business profile and strategy
    
    20
    
    fourth-quarter summary
    
    31
    
    future trends, commitments
    
    
    
    statements05
    
    highlights summary
    
    23
    
    quarterly financial data
    
    
    
    and risks
    
    48
    
    notes to consolidated06
    
    operating results
    
    23
    
    changes in accounting policy
    
    37
    
    critical accounting estimates
    
    
    
    financial statements09
    
    non-gaap earnings
    
    24
    
    liquidity and capital resources
    
    40
    
    systems, procedures
    
    87
    
    five-year summary11
    
    lines of business
    
    26
    
    balance sheet
    
    
    
    and controls
    
    88
    
    shareholder information16
    
    revenue per carload
    
    27
    
    financial instruments
    
    40
    
    forward-looking information
    
    92
    
    glossary of terms
 (PHOTO OF WORKER)  CPRs five key business thrusts: Safety CPR continued to be an industry leader in safe train operations in 2004. Freight Revenue grew by 11 % in 2004, excluding the impact of translating U.S. dollar-denominated
revenues into the stronger Canadian dollar. Yield the minimum growth target was 1.5 %, with a stretch goal of 2 % in 2004. We surpassed our
stretch goal.
 Productivity revenue-producing freight tonnage compared with train-miles accumulated in moving
the tonnage provides a strong indicator of productivity, asset utilization and fluidity. In 2004,
CPR grew revenue tonnage by 8 % while train miles increased by just one-quarter of that rate. Capacity Management co-production, alliances and interline service agreements, right-sizing train
crews and locomotive power, and disciplined execution of our Integrated Operating Plan, CPRs
scheduled railway model, had a positive impact on fluidity in 2004. Improved fluidity is creating
more revenue-generating capacity on CPRs existing track network and enhancing service quality  a
benefit for shareholders and shippers.




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##### Table of Contents



chairmans 2004 letter to shareholders J.E. NEWALL
Chairman of the Board  (J.E. NEWALL PHOTO) This is an exciting time for Canadian Pacific Railway. The company and, indeed, the railway
industry are reclaiming their position as an engine of economic expansion. In a year of strong demand for rail freight services, CPR was demonstrating how to:  
    utilize every available ton of capacity in the existing rail infrastructure;
    plan for potential expansion to deliver value to shareholders; and
    take the lead in convincing disparate and sometimes dissenting parties to coalesce around
the old-fashioned notion of working together for the greater good. To these ends, the focus of the 16,000 employees of CPR in both Canada and the United States
shifted squarely in 2004 on increasing fluidity over the network, using asset velocity to create
more capacity in tight areas as demand escalated. The results in terms of freight volumes certainly
surpassed expectations.
 Looking ahead, management has developed an infrastructure expansion plan that would potentially see
capital invested incrementally, matched to areas of high-value growth. Most importantly, management
set conditions for investing capital that will ensure there is a compelling value proposition for
shareholders associated with any future expansion. CPR also facilitated the bringing together of governments, shippers, ports, railways, truckers and
ocean shipping lines for frank discussions about economic expansion and its dependence on
transportation infrastructure. The result is an emerging common recognition that the most effective
infrastructure planning needs to involve all the players in the supply chain, supported by public
policy that creates the right climate for investment. These achievements in 2004 will serve shareholders well. Ultimately, they will result in CPR being
able to grow its business while minimizing the capital required to accommodate the growth. The Boards performance and that of its Committees was also satisfying in 2004. Our achievements
included:  
    further strengthening financial controls and governance procedures;
    advancing the companys strategic business plan; and
    ensuring meaningful succession planning is in place across senior executive ranks.
 I am pleased that CPR was among the top three in The Globe and Mailnewspapers 2004 rankings of
best corporate governance practices by Canadian industrial companies. CPRs balance sheet continued to strengthen and the companys net-debt to net-debt-plus-equity
ratio improved to 43 % in 2004, from 52 % when CPR was spun off from Canadian Pacific Limited in
2001. My message to shareholders this year would not be complete without recognizing the important
contribution of Jacques Lamarre, President and Chief Executive Officer of SNC-Lavalin Group Inc.,
who left the CPR Board in 2004. Jacques service, which began with CPRs spin-off, provided
valuable experience and insight at a critical time in the companys evolution. In serving shareholders, the Board is conscious of CPRs long and colourful history  one with a
footprint in three centuries. Our focus is clearly on the future, and it should surprise no one
that today, as world trade expands to unprecedented levels and as new economic giants emerge, CPR
is more relevant than ever and stands ready to capitalize on the opportunities that lie ahead. -s- J.E. Newall
 2004 Annual Report
    
    
    01




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presidents 2004 letter to shareholders ROBERT J. RITCHIE
President and Chief Executive Officer  (ROBERT J. RITCHIE PHOTO) Canadian Pacific Railway demonstrated the power and value of its business model and franchise
in 2004, moving decisively to make the most of a robust transportation market. Across our railway,
employees everywhere were engaged in exploiting growing world trade, including an explosion in
trade with China, and putting railway muscle behind economic expansion in North America. Our people showed what they can achieve when opportunity and challenge surface together. The result
was a CPR that was firing on all cylinders  moving more freight than ever before and moving it
increasingly faster  as demand for freight service escalated steadily. Pricing reflected the
growing value that shippers are placing on CPRs transportation service in a market made tight by
rising demand in almost every area. Growth in intermodal, which consists mainly of containerized consumer goods, outstripped every
other line of business and this highly service-sensitive area surpassed $1 billion in revenue for
the first time. The entire bulk sector was strong, led by revenue
 growth in coal, sulphur and fertilizers. Industrial products revenue increased, reversing a
three-year decline. We earned these results by advancing our leading position as a low-cost bulk carrier, becoming an
increasingly efficient and reliable intermodal service provider and offering an increasingly
attractive alternative to trucks for merchandise freight. At the root of these improvements are
investments CPR has made to build one of the most modern, reliable locomotive fleets in North
America, provide customers higher capacity freight cars, increase track capacity and rebuild our IT
foundation, together with innovation, ingenuity and discipline in train design and operations. Greater fluidity emerged as the most compelling component of our business model and we generated
strong results. During a year in which the North American rail industry had to cope with capacity
strains, CPR was an industry leader in fluidity, as measured by train speed. Productivity also rose
dramatically, with revenue tonnage growing 8 % while train-miles accumulated in moving the tonnage
increased by just one-quarter of that rate. The years headwinds came in the form of extremely high world oil prices and continued strength in
the Canadian dollar against the U.S. dollar. CPR countered with an improved fuel surcharge
mechanism in 2004 that adjusts rates more quickly as world
 prices fluctuate, and continued to use long-term debt denominated in U.S. dollars as a natural
hedge against the Canadian dollars rise. CPR exceeded its freight revenue growth target for 2004, generating a 7 % increase. Freight revenue
would have grown 11 % had it not been for the substantial appreciation in the Canadian dollar. All told, the combination of high fuel prices and the stronger Canadian dollar took approximately
$55 million out of operating income. Despite this impact, operating income, excluding other
specified items (1), rose 8 % to $789 million in 2004, compared with $730 million in
2003. CPRs operating ratio, excluding other specified items (1), improved to 79.8 % in
2004, compared with 80.1 % in 2003. Income and earnings per share grew
10 % to $361 million or $2.27 per diluted share, excluding foreign exchange gains on long-term debt
and other specified items (1). Across CPR, we are concentrating on execution, ensuring that all assets are being utilized to their
fullest extent. This means maximizing train throughput in every track corridor, maximizing capacity
on every train, keeping assets flowing with greater velocity and giving our people the tools and
training to maximize their productivity. Co-operative arrangements with other railways and disciplined execution of our Integrated Operating
Plan are key
   (1) Further information, including foreign exchange gains and losses on long-term
debt and other specified items, is available on page 8.
  02
    
    
    2004 Annual Report




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strategies behind our fluidity drive. CPR entered into a series of co-operative arrangements in
2004, including track-sharing and access to terminals. These arrangements  in western Canada,
central Canada and the northeastern U.S.  will reduce costs, improve service for shippers,
increase capacity in areas where traffic density is high and increase traffic density in areas
where capacity is underutilized. They have helped address the high demand on our western corridor,
particularly in the Greater Vancouver area, and have dramatically improved the financial
performance of our northeastern U.S. franchise. CPR is also ready to lay down track to expand our network in high-growth corridors  if conditions
are right. We have designed a phased, multi-year expansion program at a cost of approximately $500
million, focused mainly on corridors between Moose Jaw, Saskatchewan, and Vancouver. Our program,
with four discrete phases, would increase train capacity by one third. Importantly, the phased
approach would enable CPR to meter the rate of expansion in lockstep with the rate of traffic
growth to ensure the quickest possible payback on each incremental investment. Currently, we are considering only the first phase, which would cost approximately $160 million. It
would be completed in a single construction season and increase train capacity west of Moose Jaw by
more than 10%. However, this cannot happen before the Canadian government provides a clear signal of
regulatory stability  a position supported by the majority of our customers.
 Should expansion go ahead, it will be a compelling value proposition for our shareholders.
Meanwhile, we are committed to getting the most out of our current network. As fluidity improves,
subsequent expansion phases could be deferred, conserving capital for shareholders while still
growing our business. CPR entered 2005 on a very solid footing, with commodity and transportation markets strong and 600
new train crew personnel trained and ready to handle the growing demand. Our focus on fluidity will
be relentless. We expect revenue growth of 6 % to 8 % in 2005 and we intend to drive more of this
growth to the bottom line as productivity and efficiency continue to improve. We will grow
strategically, targeting high-yield traffic against CPRs capacity. CPR will continue building on
the innovative service design and operational improvements created in our bulk commodity and
intermodal sectors. The best elements will be applied to the merchandise sector, where we will
create a more efficient collection and delivery system to improve service and leverage more value
in the marketplace. Safety is and always will be our Number One priority. In 2004, CPR continued to be an industry
leader in safe train operations and our employees achieved an all-time low in personal injuries.
Sadly, these accomplishments were overshadowed by the loss in work-related incidents of three of
our fellow employees, David Rutherford, Christopher Lewis and Gary Kinakin. These tragic events
reinforce the importance of safety for our employees and their families.
 In closing, I wish to recognize the support and guidance of our Chairman and Board of Directors and
the accomplishments of our 16,000 talented employees. All of us share the excitement about CPRs
prospects for the future. The Pacific in our companys name has never been more meaningful, nor
more promising, as the world witnesses Chinas emergence as a trade powerhouse and Indias economy
is experiencing strong growth. Our railway serves some of the worlds best farmland for growing
grain. We serve the worlds main source of potash for fertilizer. We link major ports with the
consuming public. We have been doing this for 120 years and we are poised to do it better than ever
before. -s- Robert J. Ritchie
  2004 Annual Report
    
    
    03




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managements discussion and analysis   This Managements Discussion and Analysis (MD&A) supplements the Consolidated Financial
Statements and related notes for the year ended December 31, 2004. Except where otherwise
indicated, all financial information reflected herein is expressed in Canadian dollars. All
information has been prepared in accordance with Canadian generally accepted accounting principles
(GAAP).
   business profile and strategy  BUSINESS PROFILE
 STRATEGY
 ADDITIONAL INFORMATION
    04
    
    
    2004 Annual Report




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highlights summary      2004
    
    
    2003
    (1)
    
    2002
    (1)Revenues
    
    $
    3,902.9
    
    
    $
    3,660.7
    
    
    $
    3,665.6Operating expenses
    
    
    3,114.4
    
    
    
    2,931.1
    
    
    
    2,821.6Operating income, before the following:
    
    
    788.5
    
    
    
    729.6
    
    
    
    844.0Special (recovery) charge for labour restructuring and asset impairment
    
    
    (19.0
    )
    
    
    215.1
    
    
    
    Loss on transfer of assets to outsourcing firm
    
    
    
    
    
    
    28.9
    
    
    
    Special charge for environmental remediation
    
    
    90.9
    
    
    
    
    
    
    
    Operating income
    
    
    716.6
    
    
    
    485.6
    
    
    
    844.0Other charges
    
    
    36.1
    
    
    
    33.5
    
    
    
    21.8Foreign exchange gains on long-term debt (FX on LTD)
    
    
    (94.4
    )
    
    
    (209.5
    )
    
    
    (13.4
    )Interest expense
    
    
    218.6
    
    
    
    218.7
    
    
    
    242.2Income tax expense
    
    
    143.3
    
    
    
    41.6
    
    
    
    105.9Net income
    
    $
    413.0
    
    
    $
    401.3
    
    
    $
    487.5Basic earnings per share
    
    $
    2.60
    
    
    $
    2.53
    
    
    $
    3.08Diluted earnings per share
    
    $
    2.60
    
    
    $
    2.52
    
    
    $
    3.06Total assets
    
    $
    10,499.8
    
    
    $
    9,956.7
    
    
    $
    9,664.3Total long-term financial liabilities
    
    $
    5,229.2
    
    
    $
    5,347.5
    
    
    $
    4,798.2Dividends paid (per share)
    
    $
    0.515
    
    
    $
    0.510
    
    
    $
    0.510
 (1) Certain prior period figures have been restated to conform with presentation
adopted in 2004.
  2004 Annual Report
    
    
    05




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operating results CPRs net income for the year ended December 31, 2004, was $413.0 million, up $11.7 million
from $401.3 million in 2003 and down $74.5 million from $487.5 million in 2002. The increase in net
income in 2004 from that in 2003 was due to higher revenues (discussed further in this MD&A under
the heading Revenues), partially offset by:  
    increased costs for compensation and benefits, fuel, depreciation and amortization, and
purchased services and other expenses (discussed further in this MD&A under the heading
Operating Expenses, Before Other Specified Items); and
    a decrease of $115.1 million in before-tax ($130 million after tax) foreign exchange
gains on long- term debt (FX on LTD) in 2004, compared with FX on LTD in 2003. The increase in net income in 2004 was also due to:  
    a special charge of $215.1 million before tax ($141.4 million after tax) for a
restructuring initiative and an asset impairment charge taken in the second quarter of 2003;
 
    a loss on the transfer of assets to an outsourcing firm of $28.9 million before tax
($18.4 million after tax) taken in the fourth quarter of 2003; and
    a positive adjustment of $19.0 million before tax ($12.4 million after tax) taken in 2004
for the reversal of a portion of the special charge for restructuring taken in 2003. These charges were partially offset by adjustments to 2004 earnings for a special charge for
environmental clean-up costs of $90.9 million before tax ($55.2 million after tax). The above-mentioned items are discussed further under the subheading Other Specified Items in
this MD&A. Net income in 2003 decreased from that in 2002 mainly due to the special charge and the loss on
transfer of assets taken in 2003, partially offset by an after-tax FX gain on LTD of $224.4 million
in 2003, compared with an after-tax FX gain on LTD of $16.7 million in 2002. FX on LTD is discussed
further under the subheading Foreign Exchange Gains (Losses) on Long-Term Debt.
 The Company had operating income in 2004 of $716.6 million, an increase of $231.0 million from
$485.6 million in 2003 and a decrease of $127.4 million from $844.0 million in 2002. The increase
in 2004, compared with 2003, was mainly due to:  
    higher revenues resulting from increased freight volumes and rates in 2004;
    the special charge and the loss on transfer of assets taken in 2003; and
    the reversal in 2004 of a portion of the 2003 restructuring special charge. These increases were partially offset by:  
    the special charge for environmental costs taken in 2004;
    increased costs in 2004 for compensation and benefits, fuel, depreciation and amortization, and purchased services and other expenses; and
    the net effect of Foreign Exchange on U.S. dollar-denominated revenues and expenses.
    06
    
    
    2004 Annual Report




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The decline in 2003, compared with 2002, was mainly due to the net effect of Foreign Exchange on
U.S. dollar-denominated revenues and expenses, the restructuring special charge and the loss on
transfer of assets, lower grain volumes in the first half of 2003 due to drought on the Canadian
prairies, higher fuel prices and increased costs as a result of service disruptions in the first
quarter of 2003 caused by severe winter weather conditions and derailments. Diluted earnings per share (EPS) in 2004 was $2.60, an increase of $0.08 from $2.52 in 2003 and
a decrease of $0.46 from $3.06 in 2002. Diluted EPS is calculated by dividing net income by the
weighted average number of shares outstanding, adjusted for the dilutive effect of outstanding
stock options, as calculated using the Treasury Stock Method. This method assumes options that have
an exercise price below their market price are exercised and the proceeds are used to purchase
common shares at the average market price during the period.
 The
Companys operating ratio was 79.8 % in 2004, compared with 80.1
% in 2003 and 77.0 % in 2002.
The operating ratio, which excludes other specified items, provides the percentage of revenues used
to operate the railway. EFFECT OF FOREIGN EXCHANGE ON CPRS EARNINGS
 On average, a $0.01 increase in the Canadian dollar reduces annual operating income by
approximately $3 million. As a result, Foreign Exchange fluctuations had a substantial impact on
CPRs operating income in 2004 and 2003. From time to time, the Company uses foreign exchange
forward contracts in respect of hedging the effects of Foreign Exchange transaction gains and
losses and other economic effects on the Companys business. In addition, a portion of the U.S.
dollar-denominated long-term debt has been designated as a hedge of the Companys net investment in
self-sustaining foreign subsidiaries. CPRs hedging instruments are discussed further under the
heading Financial Instruments in this MD&A. The effect of Foreign Exchange on CPRs results is
further discussed under the heading Foreign Exchange in this MD&A. The Company has assumed that the average foreign exchange rate for converting U.S. dollars to
Canadian dollars will be $1.25 in 2005. This assumption has been built into all forecasts discussed
in this MD&A.
  2004 Annual Report
    
    
    07




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##### Table of Contents



decrease in earnings due to foreign exchange (1) For the year ended December 31 (in millions, except foreign exchange rate)
    
    2004
    
    
    2003Average annual foreign exchange rate
    
    $
    1.30
    
    
    $
    1.41Freight revenuesGrain
    
    $
    25
    
    
    $
    38Coal
    
    
    8
    
    
    
    12Sulphur and fertilizers
    
    
    14
    
    
    
    17Forest products
    
    
    17
    
    
    
    25Industrial products
    
    
    21
    
    
    
    32Automotive
    
    
    16
    
    
    
    25Intermodal
    
    
    26
    
    
    
    37Other revenues
    
    
    3
    
    
    
    6Total revenues
    
    
    130
    
    
    
    192Operating expensesCompensation and benefits
    
    
    28
    
    
    
    36Fuel
    
    
    24
    
    
    
    29Materials
    
    
    3
    
    
    
    5Equipment rents
    
    
    16
    
    
    
    23Depreciation and amortization
    
    
    5
    
    
    
    8Purchased services and other
    
    
    23
    
    
    
    36Total operating expenses
    
    
    99
    
    
    
    137Operating income
    
    
    31
    
    
    
    55Other expensesOther charges
    
    
    3
    
    
    
    1Interest expense
    
    
    13
    
    
    
    22Income tax expense, before FX on LTD and other specified items
    
    
    3
    
    
    
    10Income, before FX on LTD and other specified items
    
    $
    12
    
    
    $
    22
 (1)
  08
    
    
    2004 Annual Report




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non-gaap earnings CPR presents non-GAAP earnings to provide a basis for evaluating underlying earnings trends
that can be compared with results in the prior periods. Non-GAAP earnings exclude foreign currency
translation effects on long-term debt, which can be volatile and
 short term, as well as other specified items that are not among CPRs normal ongoing revenues and
operating expenses. A reconciliation of income, before FX on LTD and other specified items, to net
income, as presented in the financial statements, is detailed in the table below.
 It should be noted that CPRs earnings, before FX on LTD and other specified items, as described in
this MD&A, have no standardized meanings and are not defined by Canadian GAAP and, therefore, are
unlikely to be comparable to similar measures presented by other companies.
   summarized statement of consolidated income (reconciliation of non-GAAP earnings to GAAP earnings)
 For the year ended December 31 (in millions) (unaudited)
    
    2004
    
    
    2003 (1)
    
    
    2002 (1)Revenues
    
    $
    3,902.9
    
    
    $
    3,660.7
    
    
    $
    3,665.6Operating expenses, before other specified items (2)
    
    
    3,114.4
    
    
    
    2,931.1
    
    
    
    2,821.6Operating income, before other specified items (2)
    
    
    788.5
    
    
    
    729.6
    
    
    
    844.0Other charges
    
    
    36.1
    
    
    
    33.5
    
    
    
    21.8Interest expense
    
    
    218.6
    
    
    
    218.7
    
    
    
    242.2Income tax expense, before income tax on FX on LTD
and other specified items (2)
    
    
    172.4
    
    
    
    147.3
    
    
    
    181.2Income, before FX on LTD and other specified items(2)
    
    
    361.4
    
    
    
    330.1
    
    
    
    398.8Foreign exchange gains on long-term debtFX on LTD  gain
    
    
    94.4
    
    
    
    209.5
    
    
    
    13.4Income tax on FX on LTD
    
    
    
    
    
    
    14.9
    
    
    
    3.3FX on LTD (net of tax)
    
    
    94.4
    
    
    
    224.4
    
    
    
    16.7Other specified itemsSpecial recovery (charge) for labour restructuring and asset
impairment
    
    
    19.0
    
    
    
    (215.1
    )
    
    
    Loss on transfer of assets to outsourcing firm
    
    
    
    
    
    
    (28.9
    )
    
    
    Special charge for environmental remediation
    
    
    (90.9
    )
    
    
    
    
    
    
    Income tax on special charges
    
    
    29.1
    
    
    
    84.2
    
    
    
    Special charges and loss on transfer of assets (net of tax)
    
    
    (42.8
    )
    
    
    (159.8
    )
    
    
    Revaluation of future income taxes
    
    
    
    
    
    
    59.3
    
    
    
    Effect of increase in tax rates
    
    
    
    
    
    
    (52.7
    )
    
    
    Income tax recovery
    
    
    
    
    
    
    
    
    
    
    72.0Net income
    
    $
    413.0
    
    
    $
    401.3
    
    
    $
    487.5
 (1)
 (2)
  2004 Annual Report
    
    
    09




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##### Table of Contents



NON-GAAP RESULTS
 partially offset by the negative effect of Foreign Exchange on U.S. dollar-denominated revenues and
expenses, an increase in volume-related expenses and in labour costs due to inflation, incentive
compensation, training and benefits, and costs and lost revenues associated with an avalanche in
the first quarter of 2004. The Company
 transported higher freight volumes in 2003, compared with 2002. However, additional income
generated by this growth was more than offset by the negative effect of Foreign Exchange on U.S.
dollar-denominated revenues and expenses, severe winter weather conditions, derailments and
persistently high fuel prices.
   non-gaap performance indicators (reconciliation of non-GAAP EPS to GAAP EPS)
 For the year ended December 31 (unaudited)
    
    2004
    
    
    2003 (1)
    
    
    2002 (1)Diluted EPS, as determined by GAAP
    
    $
    2.60
    
    
    $
    2.52
    
    
    $
    3.06Diluted EPS, related to FX on LTD  net of tax
    
    
    (0.59
    )
    
    
    (1.41
    )
    
    
    (0.11
    )Diluted EPS, related to other specified items  net of tax
    
    
    0.26
    
    
    
    0.96
    
    
    
    (0.45
    )Diluted EPS, before FX on LTD and other specified items (2)
    
    $
    2.27
    
    
    $
    2.07
    
    
    $
    2.50
 (1)
 (2)
  Diluted EPS, before FX on LTD and other specified items, was $2.27 in 2004, an increase of
$0.20 from $2.07 in 2003 and a decrease of $0.23 from $2.50 in 2002. Diluted EPS, before FX on LTD
and other specified items, is calculated by dividing income, before FX on LTD and other specified
items, by the weighted average number of shares outstanding, adjusted for outstanding stock options
using the Treasury Stock Method, as described on page 7. FOREIGN EXCHANGE GAINS (LOSSES) ON LONG-TERM DEBT
 can only be realized when net U.S. dollar-denominated long-term debt matures or is settled. Income,
before FX on LTD and other specified items, as calculated on page 9, excludes FX on LTD from CPRs
earnings in order to eliminate the impact of volatile short-term exchange rate fluctuations. Foreign exchange gains on long-term debt were $94.4 million before tax in 2004, $209.5 million
before tax in 2003 and $13.4 million before tax in 2002. The changes were due to the effect of
Foreign Exchange, net of hedging, on U.S. dollar-denominated long-term debt. For every $0.01 the
Canadian dollar strengthens relative to the U.S. dollar, the conversion of U.S. dollar-denominated
long-term debt to Canadian dollars creates a pre-tax foreign exchange gain of approximately $9
million to $10 million.
 OTHER SPECIFIED ITEMS   Other specified items included a special charge of $55.2 million after tax ($90.9 million before
tax) taken in the fourth quarter of 2004 to reflect the estimated costs required to clean up
environmental contamination at a property in Minnesota. This charge is discussed further in this
MD&A in the section Future Trends, Commitments and Risks, under the sub-heading Environmental.
    10
    
    
    2004 Annual Report




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##### Table of Contents



In the fourth quarter of 2004, net income included a positive adjustment of $12.4 million after tax
($19.0 million before tax) to reflect a reversal of a portion of the labour liability included in
the special charge taken in the second quarter of 2003. The labour liability included in the
special charge was for original estimates of labour liabilities to be incurred to restructure CPRs
northeastern U.S. operations. In 2004, CPR achieved a successful new arrangement with Norfolk
Southern Railway for operations in the region. The arrangement, which received the first stage of
regulatory approval in the fourth quarter of 2004, is delivering efficiency improvements. As a
result, the Company did not incur the expected labour restructuring costs and the liability
associated with restructuring CPRs northeastern U.S. operations was reversed. In the second quarter of 2003, a special charge of $141.4 million after tax ($215.1 million before
tax) was taken to reflect the costs associated with a restructuring initiative that is expected to
eliminate 820 jobs by the end of 2005 and to adjust the value of certain under-performing assets to
fair value.
 In the fourth quarter of 2003, CPR transferred assets to IBM Canada Ltd. (IBM) as part of a
seven-year, $200-million agreement reached with IBM to operate and enhance CPRs computing
infrastructure. The arrangement will reduce CPRs costs over time and allow remaining information
technology staff to focus on applications that improve efficiency and service. The Company
recognized a loss of $18.4 million after tax ($28.9 million before tax) on the transfer of these
assets. This loss is included in other specified items in 2003. In December 2003, the Government of Ontario repealed previously announced future income tax rate
reductions. The Companys future income taxes, which were previously based on these reduced rates,
have been adjusted upwards by $52.7 million to reflect the change. Following a revaluation in 2003 of various other components that determine its future income tax
liability, the Company reduced the estimate of its future income tax liability by $59.3 million.
 In 2002, there was one other specified item of $72 million resulting from a favourable income tax
ruling relating to prior years. lines of business VOLUMES
    2004 Annual Report
    
    
    11




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##### Table of Contents



VOLUMES  For the year ended December 31
    
    2004
    
    
    2003
    
    
    2002Carloads (in thousands)Grain
    
    
    321.2
    
    
    
    308.7
    
    
    
    291.1Coal
    
    
    395.2
    
    
    
    359.6
    
    
    
    351.8Sulphur and fertilizers
    
    
    211.8
    
    
    
    189.0
    
    
    
    174.4Forest products
    
    
    160.3
    
    
    
    164.2
    
    
    
    174.2Industrial products
    
    
    286.3
    
    
    
    263.4
    
    
    
    271.9Automotive
    
    
    171.7
    
    
    
    177.2
    
    
    
    178.1IntermodalIntermodal
    
    
    1,119.6
    
    
    
    1,041.9
    
    
    
    971.2Food and consumer
    
    
    32.7
    
    
    
    35.2
    
    
    
    34.6Total Intermodal
    
    
    1,152.3
    
    
    
    1,077.1
    
    
    
    1,005.8Total carloads
    
    
    2,698.8
    
    
    
    2,539.2
    
    
    
    2,447.3Revenue ton-miles (in millions)Grain
    
    
    23,805
    
    
    
    23,040
    
    
    
    20,808Coal
    
    
    25,241
    
    
    
    22,155
    
    
    
    21,904Sulphur and fertilizers
    
    
    20,418
    
    
    
    18,186
    
    
    
    15,737Forest products
    
    
    10,557
    
    
    
    10,789
    
    
    
    11,014Industrial products
    
    
    14,196
    
    
    
    13,229
    
    
    
    12,801Automotive
    
    
    2,291
    
    
    
    2,564
    
    
    
    2,932IntermodalIntermodal
    
    
    25,749
    
    
    
    23,132
    
    
    
    21,029Food and consumer
    
    
    1,370
    
    
    
    1,504
    
    
    
    1,464Total Intermodal
    
    
    27,119
    
    
    
    24,636
    
    
    
    22,493Total revenue ton-miles
    
    
    123,627
    
    
    
    114,599
    
    
    
    107,689
  REVENUES   CPR maintains competitive freight rates and reviews its rates on a
 regular basis, adjusting them for market conditions as warranted. Current strong demand in the
transportation market has resulted in favourable pricing conditions for CPR. Total revenues, which consist of freight and other revenues, were $3,902.9 million in 2004, an
increase of $242.2 million from $3,660.7 million in 2003, and an increase of $237.3 million from
$3,665.6 million in 2002. Increases were achieved
 through strong volume growth and freight rate improvements in 2004, compared with 2003, which more
than offset the approximately $130-million negative impact of Foreign Exchange on U.S.
dollar-denominated revenues. Strong volume growth was achieved in 2003, compared with 2002.
However, corresponding growth in freight revenues was significantly offset by a negative Foreign
Exchange impact of approximately $192 million.
    12
    
    
    2004 Annual Report




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##### Table of Contents



REVENUES  For the year ended December 31 (in millions)
    
    2004
    
    
    2003
    
    
    2002Grain
    
    $
    668.2
    
    
    $
    644.4
    
    
    $
    631.4Coal
    
    
    530.3
    
    
    
    444.0
    
    
    
    442.5Sulphur and fertilizers
    
    
    460.0
    
    
    
    417.4
    
    
    
    401.3Forest products
    
    
    322.0
    
    
    
    328.8
    
    
    
    360.3Industrial products
    
    
    430.2
    
    
    
    400.4
    
    
    
    422.1Automotive
    
    
    288.5
    
    
    
    304.2
    
    
    
    332.4IntermodalIntermodal
    
    
    978.4
    
    
    
    880.6
    
    
    
    818.8Food and consumer
    
    
    51.2
    
    
    
    59.5
    
    
    
    63.1Total Intermodal
    
    
    1,029.6
    
    
    
    940.1
    
    
    
    881.9Total freight revenues
    
    $
    3,728.8
    
    
    $
    3,479.3
    
    
    $
    3,471.9Other revenuesOther intermodal
    
    
    56.3
    
    
    
    45.8
    
    
    
    36.6Non-freight and switching
    
    
    117.8
    
    
    
    135.6
    
    
    
    157.1Total other revenues
    
    
    174.1
    
    
    
    181.4
    
    
    
    193.7Total revenues
    
    $
    3,902.9
    
    
    $
    3,660.7
    
    
    $
    3,665.6
  FREIGHT REVENUES
 improved grain crops as shipments began to recover from the drought-induced decline experienced
throughout 2002 and in the first half of 2003. In response to rapidly rising fuel prices, the Company has revised its method of calculating the
surcharge applied to help recover fuel costs. A new fuel surcharge program provides customers with
surcharges that are more closely tied to current fuel prices and enables CPR to adjust its rates
more quickly as fuel prices fluctuate. In 2004, the increase in fuel surcharge, included in freight
revenues, recovered approximately two-thirds of CPRs fuel price increase (including the effects of
hedging). At December 31, 2004, one customer comprised 11.7 % of total revenues and 12.4 % of CPRs total
accounts receivable. At December 31, 2003 and 2002, no customers revenues were greater than 10 %
of total revenues.
 Grain
    2004 Annual Report
    
    
    13




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increase was partially offset by the effect of Foreign Exchange. Furthermore, total grain revenues
were reduced by penalties paid for delays in grain shipments. U.S. and Canadian grain shipments
also benefited in 2003, compared with 2002, from a larger crop production and favourable market
conditions in the second half of 2003. This growth was partially offset by a reduction in revenues
as a result of the effect of Foreign Exchange, the effect of the drought in the first half of 2003
and the repercussions from a Port of Vancouver labour disruption in the fourth quarter of 2002 that
carried into the first quarter of 2003. Coal
 The Company is currently in dispute with its main coal customer, Elk Valley Coal Corporation
(EVCC). CPR has included a reasonable accrual in its coal revenues for amounts that may be owing
to CPR as a result of this dispute. The EVCC dispute is discussed further in this MD&A under the
heading Future Trends, Commitments and Risks. Sulphur and Fertilizers   Forest Products
 in the first half of 2004. These factors were partially offset by a shift to rail transportation
from truck in the newsprint market in the second half of 2004, and increased freight rates.
Revenues were lower in 2003 than in 2002 mainly as a result of the effect of Foreign Exchange and
declines in the markets for wood pulp and newsprint. Industrial Products   Automotive
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    2004 Annual Report




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2003, due to the effect of Foreign Exchange, a decline in consumer demand for certain vehicle
models in 2004 and the loss of certain business to a competing railway. This decrease was partially
offset by a power outage that affected CPRs customers in eastern Canada and the northeastern U.S.,
resulting in reduced automotive shipments and revenues in the third quarter of 2003. Revenues in
2003 were lower than in 2002 due to the effect of Foreign Exchange, the power outage and a decline
in consumer demand. Intermodal
 higher demand in the retail market and rate increase initiatives. Domestic revenue growth in 2003,
compared with 2002, was due largely to the success of CPRs co-location initiative, under which
major retailers have built regional distribution facilities adjacent to certain CPR intermodal
terminals. Increases in all intermodal revenues in 2004 and in 2003 were partially offset by the
effect of Foreign Exchange. CPRs food and consumer group has historically been reported as part of the intermodal business
line. However, as a result of changes in CPRs market, management believes it would be more
appropriate to include this group with the industrial products business line. As a result, the food
and consumer reporting will transition to industrial products from the intermodal business line.
The food and consumer portfolio consists of miscellaneous products, including sugar, meat
by-products, railway equipment and building materials moving primarily from western Canada to
various destinations in the United States. Expectations for 2005
 OTHER REVENUES   Other intermodal revenues are derived mainly from container storage and terminal service fees.
Other intermodal revenues in 2004 were $56.3 million, an increase of $10.5 million from $45.8
million in 2003, and an increase of $19.7 million from $36.6 million in 2002. The increases in 2003
and 2004 reflect higher intermodal volumes resulting in higher container storage and terminal
service fees. Non-freight and switching revenues are comprised of leasing of certain assets, switching fees, land
sales and income from business partnerships. These revenues in 2004 were $117.8 million, a decrease
of $17.8 million from $135.6 million in 2003, and a decrease of $39.3 million from $157.1 million
in 2002. Other non-freight and switching revenues were lower in 2004, compared with 2003, mainly
due to lower land and leasing revenues and lower equity income from business partnerships. Other revenues in 2003 were lower than in 2002 due to the effect of Foreign Exchange, lower
switching fees and reduced income from business partnerships. In addition, there were favourable
adjustments in 2002 as a result of a gain on a property sale from a previous period, partially
offset by increased land sales and container storage fees.
    2004 Annual Report
    
    
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revenue per carload Freight revenue per carload is the amount of freight revenue earned for every carload moved,
calculated by dividing the freight revenue for a commodity by the number of carloads
 of the commodity transported in the period. Total freight revenue per carload was $1,382 in 2004,
an increase of $12 from $1,370 in 2003 and a decrease of $37 from $1,419 in 2002. The increase in
2004, compared with 2003, was due to higher freight
 rates, which more than offset the effect of Foreign Exchange. In 2003, compared with 2002, revenue
per carload decreased as the effect of Foreign Exchange more than offset freight rate increases.
   freight revenue per carload For the year ended December 31 ($) (unaudited)
    
    2004
    
    
    2003
    
    
    2002Total freight revenue per carload
    
    
    1,382
    
    
    
    1,370
    
    
    
    1,419Grain
    
    
    2,080
    
    
    
    2,087
    
    
    
    2,169Coal
    
    
    1,342
    
    
    
    1,235
    
    
    
    1,258Sulphur and fertilizers
    
    
    2,172
    
    
    
    2,208
    
    
    
    2,301Forest products
    
    
    2,009
    
    
    
    2,002
    
    
    
    2,068Industrial products
    
    
    1,503
    
    
    
    1,520
    
    
    
    1,552Automotive
    
    
    1,680
    
    
    
    1,717
    
    
    
    1,866Intermodal (including Food and consumer)
    
    
    894
    
    
    
    873
    
    
    
    877
 performance indicators The Company believes that the indicators listed in this table are the most accurate measures of
its business performance. For the year ended December 31 (unaudited)
    
    2004
    
    
    2003 (1)
    
    
    2002 (1)Productivity indicatorsGross ton-miles of freight (millions)
    
    
    236,451
    
    
    
    221,884
    
    
    
    209,596Train-miles (thousands)
    
    
    41,344
    
    
    
    40,470
    
    
    
    38,299Average train weights (tons)
    
    
    5,719
    
    
    
    5,483
    
    
    
    5,473Efficiency and other indicatorsU.S. gallons of fuel per 1,000 GTMs
    
    
    1.20
    
    
    
    1.24
    
    
    
    1.24Average number of active employees
    
    
    16,056
    
    
    
    16,126
    
    
    
    16,116Miles of road operated at end of period
    
    
    13,817
    
    
    
    13,848
    
    
    
    13,874Freight revenue per RTM (cents)
    
    
    3.02
    
    
    
    3.04
    
    
    
    3.22Safety indicatorsFRA personal injuries per 200,000 employee-hours
    
    
    2.7
    
    
    
    3.1
    
    
    
    3.6FRA train accidents per million train-miles
    
    
    2.1
    
    
    
    1.8
    
    
    
    1.8
 (1)
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    2004 Annual Report




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PRODUCTIVITY INDICATORS    
    Train-miles is a measure reflecting the distance traveled by the lead locomotive on each
train operating over CPRs track. An increase in gross ton-miles (GTM) without a
corresponding increase in train-miles indicates higher efficiency.
    Average train weight is the result of dividing GTMs by train-miles. It represents the
average total weight of all CPR trains operating over CPRs track and track on which CPR has
running rights. Fluctuations in these indicators normally drive corresponding fluctuations in certain variable
costs such as fuel and crew costs. EFFICIENCY AND OTHER INDICATORS  
    U.S. gallons of fuel per 1,000 GTMs represents the total fuel consumed in freight and
yard operations for every 1,000 GTMs traveled. This metric is calculated by dividing the
total amount of fuel issued to CPR locomotives, excluding commuter and non-freight
activities, by the total freight-related GTMs. The result indicates how efficiently the
Company is using fuel. This indicator improved 3 % in 2004 from 2003 as a result of
productivity initiatives and improved operating conditions. This statistic was unchanged in 2003 from 2002, as harsh operating conditions in the first
quarter of 2003 were offset by the acquisition of new, more fuel-efficient locomotives and
more efficient utilization of locomotives.
 
    Average number of active employees is the average number of actively employed workers for
the period. The number of actively employed workers includes employees who are taking vacation and
statutory holidays and other forms of short-term paid leave, and excludes individuals who have
a continuing employment relationship with CPR but are not currently working. This indicator is
calculated by adding the monthly average employee counts and dividing this total by the number
of months in the period. CPRs average number of active employees decreased 0.4 % in 2004,
compared with 2003, as reductions made under restructuring initiatives were offset by hiring
to handle business growth. CPRs average number of active employees rose 0.1 % in 2003,
compared with 2002, as hiring to handle business growth offset job reductions made under
restructuring initiatives.
    Miles of road operated is the total length of all rail lines over which CPR operates,
excluding track on which it has haulage rights. An increase in GTMs without a corresponding
increase in miles of road operated indicates higher utilization of assets.
    Freight revenue per RTM is the amount of freight revenue earned for every RTM moved,
calculated by dividing the total freight revenue by the total RTMs in the period. This
indicator decreased slightly in 2004, compared with 2003, mainly due to the effect of
Foreign Exchange, partially offset by initiatives for rate increases. This indicator
decreased in 2003, compared with 2002, mainly due to changes in the mix of commodities moved
and the effect of Foreign Exchange, partially offset by an increase in rates.
 SAFETY INDICATORS    
    FRA personal injuries per 200,000 employee-hours is the number of personal injuries,
multiplied by 200,000 and divided by total employee-hours. Personal injuries are defined as
injuries that require employees to lose time away from work, modify their normal duties or
obtain medical treatment beyond minor first aid. Employee-hours are the total hours worked,
excluding vacation and sick time, by all employees, excluding
contractors. CPRs continued reduction in personal injuries is the result of ongoing focused safety
management processes, which involve more than 1,000 employees in planning and implementing
safety-related activities.
    FRA train accidents per million train-miles is calculated as the number of train
accidents, multiplied by 1,000,000 and divided by total train-miles. Train accidents
included in this metric meet or exceed the FRA reporting threshold of
US$6,700. This metric increased 17 % in 2004, compared with each of the two previous years. The increase
occurred during the first two quarters of 2004, and in particular, during the colder than
average weather experienced early in the year.
    2004 Annual Report
    
    
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operating expenses, before other specified items (1) For the year ended December 31
    
    2004
    
    
    2003 (2)
    
    
    2002 (2)(in millions)
    
    Expense
    
    
    % of revenue
    
    
    Expense
    
    
    % of revenue
    
    
    Expense
    
    
    % of revenueCompensation and benefits
    
    $
    1,259.6
    
    
    
    32.3
    
    
    $
    1,163.9
    
    
    
    31.8
    
    
    $
    1,143.4
    
    
    
    31.2Fuel
    
    
    440.0
    
    
    
    11.3
    
    
    
    393.6
    
    
    
    10.8
    
    
    
    358.3
    
    
    
    9.8Materials
    
    
    178.5
    
    
    
    4.6
    
    
    
    179.2
    
    
    
    4.9
    
    
    
    168.7
    
    
    
    4.6Equipment rents
    
    
    218.5
    
    
    
    5.6
    
    
    
    238.5
    
    
    
    6.5
    
    
    
    255.4
    
    
    
    7.0Depreciation and amortization
    
    
    407.1
    
    
    
    10.4
    
    
    
    372.3
    
    
    
    10.2
    
    
    
    340.2
    
    
    
    9.3Purchased services and other
    
    
    610.7
    
    
    
    15.6
    
    
    
    583.6
    
    
    
    15.9
    
    
    
    555.6
    
    
    
    15.1Total
    
    $
    3,114.4
    
    
    
    79.8
    
    
    $
    2,931.1
    
    
    
    80.1
    
    
    $
    2,821.6
    
    
    
    77.0
 (1)
 (2)
  Operating expenses, before other specified items, were $3,114.4 million in 2004, an increase of
$183.3 million from $2,931.1 million in 2003, and an increase of $292.8 million from $2,821.6
million in 2002. In 2004, compared with 2003, operating expenses increased due largely to
inflation, higher fuel, depreciation and compensation and benefits costs, and higher costs
associated with business growth, partially offset by an approximately $99-million Foreign Exchange
impact. In 2003, compared with 2002, Foreign Exchange had a favourable impact of approximately $137
million on operating expenses, which was offset by inflation, higher depreciation and fuel prices,
higher costs associated with business growth, and service disruptions in the first quarter of 2003
caused by severe winter weather conditions and derailments. COMPENSATION AND BENEFITS
 2003, and an increase of $116.2 million from $1,143.4 million in 2002.
Performance-based incentive compensation expenses increased in 2004, compared with 2003 when these
expenses were abnormally low. Expenses also increased in 2004 as a result of higher costs
associated with inflation, pension expense, training costs for new train crew employees, selective
hiring to handle increased freight volumes as well as favourable expense adjustments during the
first quarter of 2003, partially offset by lower expenses resulting from restructuring initiatives.
Expenses in 2003 increased over 2002 as higher costs associated with inflation, severe winter
conditions, pension expense and selective hiring to handle increased freight volumes were partially
offset by lower variable incentive compensation costs, restructuring initiatives, expense
adjustments during the first quarter of 2003 and the positive impact of Foreign Exchange. FUEL
 hedging program. In 2004, fuel expense was $440.0 million, an increase of $46.4 million from $393.6
million in 2003, and an increase of $81.7 million from $358.3 million in 2002. Fuel expense
increased in 2004, compared with 2003, due to higher crude oil prices and volumes, partially offset
by the effect of Foreign Exchange on U.S. dollar-denominated fuel expenses, more efficient fuel
consumption, favourable refining margins and positive inventory adjustments. Fuel expense in 2003
was higher than in 2002 as a result of significantly higher fuel prices and greater consumption
associated with increased freight volumes and severe winter operating conditions. These increases
were partially offset by CPRs fuel-hedging program and the positive effect of Foreign Exchange. MATERIALS
    18
    
    
    2004 Annual Report




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with 2003, was due to lower material usage for track maintenance, reduced computer hardware and
software expenses beginning in January 2004 as a result of a new outsourcing agreement with IBM,
and the effect of Foreign Exchange, offset by higher fuel costs for vehicles and increased
locomotive repair and servicing materials. Expenses increased in 2003 over 2002 due to increased
materials required for repairs, derailment costs and favourable adjustments made in 2002, partially
offset by the effect of Foreign Exchange. EQUIPMENT RENTS
 DEPRECIATION AND AMORTIZATION   PURCHASED SERVICES AND OTHER
 personal injuries. Expenses increased in 2003 over 2002 due to higher insurance premiums, derailment costs,
volume-related expenses and favourable adjustments made in 2002. EXPECTATIONS FOR 2005   other income statement items OTHER CHARGES
    2004 Annual Report
    
    
    19




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income. Other charges were $36.1 million in 2004, an increase of $2.6 million from $33.5 million in
2003, and an increase of $14.3 million from $21.8 million in 2002. The increase in 2004, compared
with 2003, was due to changes in the fair value of derivative instruments that were not eligible
for hedge accounting under the Canadian Institute of Chartered Accountants (CICA) Accounting
Guideline 13 (AcG 13), discussed under the heading Changes in Accounting Policy in this MD&A,
and the effect of Foreign Exchange on working capital accounts. The increase in 2003, compared with
2002, was due to a benefit in 2002 from interest income on a tax recovery and interest paid in 2003
on an income tax settlement. INTEREST EXPENSE
 this MD&A) resulted in lower cost savings and, therefore, an increase to 2004 interest expense. The
decrease in 2003 from 2002 was due to the replacement of higher-cost debt with lower-cost debt and
the positive impact of Foreign Exchange and interest rate swaps. The decrease was partially offset
by interest on the $350-million 4.9 % Medium Term Notes. INCOME TAXES   The effective income tax rate for 2004 was 25.9 %, compared with 9.4 % for 2003 and 17.9 % for
2002. The normalized rates (income tax rate based on income adjusted for FX on LTD and other
specified items) for 2004, 2003 and 2002 were 32.3 %, 30.9 % and 31.2 %, respectively. In December 2003, the Government of Ontario repealed previously announced future income tax rate
reductions. The Companys future income tax liability, which was previously based on these reduced
rates, was increased by $52.7 million to reflect the change. This adjustment is also discussed in
the section Non-GAAP Earnings, under the sub-heading Other Specified Items. Following a revaluation in 2003 of various components used to determine its future income tax
liability, the Company reduced the estimate of its future income tax liability by $59.3 million.
This adjustment is also
 discussed in the section Non-GAAP Earnings, under the sub-heading Other Specified Items. In 2002, the Company reported an income tax recovery of approximately $72.0 million stemming from a
favourable tax decision by the Federal Court of Appeal. This decision resulted in an effective tax
rate of 17.9 %, compared with a normalized income tax rate of approximately 31.2 %. This adjustment
is also discussed in the section Non-GAAP Earnings, under the sub-heading Other Specified
Items. EXPECTATIONS FOR 2005   In recent years, CPR has been using certain tax loss carryforwards to offset taxable income. The
Company anticipates that these loss carryforwards will be exhausted by 2007 and CPR will have an
increase in tax payments during that year. fourth-quarter summary OPERATING RESULTS
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freight, compared with 58,887 million GTMs and 30,792 million RTMs in the fourth quarter of 2003.
The increases were largely responsible for a 7 % rise in freight revenues in the fourth quarter of
2004, compared with the same period in 2003. There was also an increase in related variable
expenses in the fourth quarter of 2004, compared with fourth-quarter 2003. The Company reported net income of $129.3 million in the fourth quarter of 2004, a decrease of
$44.7 million from $174.0 million in the same period of 2003. The decrease was mainly due to a
special charge of $55.2 million after tax ($90.9 million before tax) taken in the fourth quarter of
2004 to reflect clean-up costs for environmental contamination at a property in Minnesota
(discussed further under the heading Future Trends, Commitments and Risks in this MD&A) and an FX
gain on LTD. The FX gain on LTD in the fourth quarter of 2004 was $55.8 million after tax, compared
with $72.0 million after tax in the same period in 2003. The decrease was partially offset by a
$12.4-million after-tax reversal ($19.0 million before tax) of part of a restructuring charge taken
in the second quarter of 2003, and a loss on the transfer of assets to an outsourcing firm of $18.4
million after tax ($28.9 million before tax) in the fourth quarter of 2003 (discussed further under
the sub-heading Other Specified Items in this MD&A). Operating income for the three-month period ended December 31, 2004, was $161.1 million, a decrease
of $32.2 million from $193.3 million in the same period of 2003. The decrease was mainly due to the
special charge for environmental clean-up costs. This decrease was partially offset by higher
 freight volumes, resulting in increased revenues in 2004 (discussed under the sub-heading
Revenues below), partially offset by a corresponding increase in volume-related expenses. The
decrease was also partially offset by the reversal of part of the restructuring charge taken in the
second quarter of 2003, and the loss on the transfer of assets to an outsourcing firm in the fourth
quarter of 2003. Diluted EPS was $0.81 in the fourth quarter of 2004, a decrease of $0.28 from $1.09 in the same
period of 2003. NON-GAAP EARNINGS   REVENUES   Grain   Coal
 world demand for metallurgical coal, and a positive rate adjustment in the fourth quarter of 2004
as a result of a settlement for eastbound Canadian coal shipments. Sulphur and Fertilizers   Forest Products   Industrial Products   Automotive   Intermodal
    2004 Annual Report
    
    
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$246.4 million in the same period of 2003. In the import/export business, growth was mainly due to
increased volumes in the export sector at the ports of Vancouver and Montreal as a result of
improved world economic conditions and a general trend toward containerized traffic. Growth in the
domestic market was due to greater demand in retail businesses. Revenues in the import/export and
domestic businesses also increased due to higher freight rates. OPERATING EXPENSES, BEFORE OTHER SPECIFIED ITEMS   Compensation and Benefits   Fuel
 Materials   Equipment Rents   Depreciation and Amortization   Purchased Services and Other
 associated with derailments, mishaps and personal injury claims, and the positive effect of Foreign
Exchange. OTHER INCOME STATEMENT ITEMS   LIQUIDITY AND CAPITAL RESOURCES
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quarterly financial data For the quarter ended(in millions, except per share data)
    
    2004
    
    
    2003 (1)(unaudited)
    
    Dec. 31
    
    
    Sept. 30
    
    
    June 30
    
    
    Mar. 31
    
    
    Dec. 31
    
    
    Sept. 30
    
    
    June 30
    
    
    Mar. 31Total revenue
    
    $
    1,021.9
    
    
    $
    989.7
    
    
    $
    1,004.7
    
    
    $
    886.6
    
    
    $
    963.5
    
    
    $
    904.3
    
    
    $
    914.1
    
    
    $
    878.8Operating income (loss)
    
    $
    161.1
    
    
    $
    218.9
    
    
    $
    220.6
    
    
    $
    116.0
    
    
    $
    193.3
    
    
    $
    203.6
    
    
    $
    (29.2
    )
    
    $
    117.9Net income
    
    $
    129.3
    
    
    $
    176.5
    
    
    $
    83.7
    
    
    $
    23.5
    
    
    $
    174.0
    
    
    $
    91.3
    
    
    $
    34.1
    
    
    $
    101.9Basic earnings per share
    
    $
    0.81
    
    
    $
    1.11
    
    
    $
    0.53
    
    
    $
    0.15
    
    
    $
    1.10
    
    
    $
    0.57
    
    
    $
    0.22
    
    
    $
    0.64Diluted earnings per share
    
    $
    0.81
    
    
    $
    1.11
    
    
    $
    0.53
    
    
    $
    0.15
    
    
    $
    1.09
    
    
    $
    0.57
    
    
    $
    0.22
    
    
    $
    0.64
 
 (1)
  QUARTERLY TRENDS   Operating income is also affected by seasonal fluctuations. Operating income is typically lowest in
the first quarter due to higher operating costs as a result of winter weather. Operating and net income in the fourth quarter of 2004 were negatively affected by a special charge
for environmental clean-up costs associated with a property in Minnesota but were positively
impacted by a
 reversal of a portion of a special charge for restructuring that was originally recorded in the
second quarter of 2003. A special charge for restructuring and asset impairment recorded in the second quarter of 2003 and
a loss on transfer of assets related to an outsourcing agreement with IBM in the fourth quarter of
2003 negatively affected operating and net income for that year. Net income is influenced by seasonal fluctuations, including weather-related costs, as well as FX
on LTD, the special charges and the loss on transfer of assets. changes in accounting policy 2004 ACCOUNTING CHANGES   Hedging Transactions
 accounting. It also establishes conditions for applying, and the discontinuance of, hedge
accounting and hedge effectiveness testing requirements. Under the new guideline, the Company is
required to document its hedging transactions and explicitly demonstrate that hedges are effective
in order to continue hedge accounting for positions hedged with derivatives. Any derivative
financial instruments that fail to meet the hedging criteria are accounted for in accordance with
Emerging Issues Committee Abstract 128 Accounting for Trading, Speculative or Non-Hedging
Derivative Financial Instruments (EIC-128). These instruments are recorded on the Consolidated
Balance Sheet at fair value and changes in fair value are recognized in income in the period in
which the change occurs. In connection with the implementation of AcG 13, the Company considered its hedging relationships
at January 1, 2004, and determined that its cross-currency interest rate swap agreements, with a
notional amount of $105 million at December 31, 2003, no longer qualified for hedge accounting for
Canadian GAAP purposes. These swap agreements are discussed further under the heading Financial
Instruments.
    2004 Annual Report
    
    
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Beginning January 1, 2004, derivative instruments that do not qualify as hedges and those not
designated as hedges are being carried on the Consolidated Balance Sheet at fair value and will
result in gains and losses being recorded on the Statement of Consolidated Income. In 2004, a
$1.5-million pre-tax gain was reported in Other Charges on the Statement of Consolidated Income. Further discussion of CPRs derivative instruments is provided under the heading Financial
Instruments. Asset Retirement Obligations   The effect on CPRs earnings from adopting this standard is discussed under the sub-heading
Property, Plant and Equipment.
 Stock-based Compensation   In 2004, Compensation and Benefits expense on the Statement of Consolidated Income increased $5.8 million as a result of
adopting this standard. liquidity and capital resources CPR believes that adequate amounts of cash and cash equivalents are available in both the short
term and the long term to provide for ongoing operations, including the obligations identified in
the tables under the heading Contractual Commitments and the sub-heading Financial Commitments.
CPR is not aware of any trends or expected fluctuations in its liquidity that would create any
deficiencies. The following discussion of operating, investing and financing activities describes
CPRs indicators of liquidity and capital resources. OPERATING ACTIVITIES
 payments in 2004. The decrease in 2003 from 2002 was mainly due to the additional pension funding
payment of $300.0 million and lower net income in 2003. There are no specific or unusual requirements relating to CPRs working capital. In addition, there
are no unusual restrictions on any subsidiarys ability to transfer funds to CPR. INVESTING ACTIVITIES   Capital spending in 2005 is projected to be approximately $760 million, mainly for track
infrastructure renewal and locomotive acquisitions and overhauls. The Companys capital spending
outlook is based on certain assumptions about events and developments that may not materialize or
that may be offset entirely or partially by other events and developments. CPRs 2005 capital
spending outlook assumes that capital additions will increase in 2005 from 2004 as a result of
increased track-related investments, which are partly due to growing freight volumes.
    24
    
    
    2004 Annual Report




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CPR intends to finance capital expenditures from free cash flow, but may finance some equipment
with new debt, if required. FINANCING ACTIVITIES   CPR completed one Senior Secured Notes offering in the first quarter of 2004  5.41 % US$145
million issued March 2004, maturing March 2024, to fund the acquisition of locomotives. CPR completed two unsecured debt offerings in 2003  5.75 % US$250-million Debentures issued March
2003, maturing March 2033, and 4.9 % $350-million Medium Term Notes issued July 2003, maturing June
2010. The former was to refinance CPRs 6.875 % US$250-million Notes that matured in April 2003.
The latter was to take
 advantage of the low interest rate environment and provide funds for general operating purposes. CPR has available, as sources of financing, credit facilities of up to $545.0 million. CPR believes
it can raise capital, within limits, in excess of these amounts, if required, while maintaining its
credit quality in international debt markets. CPRs unsecured long-term debt securities are rated
Baa2, BBB and BBB by Moodys Investors Service, Inc., Standard and Poors Corporation and
Dominion Bond Rating Service, respectively. CPR filed a US$750-million base shelf prospectus with the U.S. Securities and Exchange Commission
in May 2004 to provide the financial flexibility to offer debt securities for sale. The Company
plans to issue Medium Term Notes in the first half of 2005, primarily to finance the purchase of
additional locomotives. At December 31, 2004, CPRs net-debt to net-debt-plus-equity ratio improved to 42.9 %, compared
with 46.9 % and 47.4 % at December 31, 2003 and 2002, respectively. The improvement in 2004,
compared with 2003, was due primarily to the increase in equity from 2004 earnings and increased
cash balances. The improvement in 2003, compared with 2002, was due primarily to the increase in
equity from 2003 earnings, offset by decreased cash balances and a net increase in debt. Net debt
is the sum of long-term debt, long-term debt maturing within one year and short-term borrowing,
less cash and short-term investments. This is divided by the sum of net debt
 plus total shareholders equity as presented on CPRs Consolidated Balance Sheet. Management is committed to maintaining its net-debt to net-debt-plus-equity ratio at an acceptable
level and intends to continue to manage the Companys capital employed so that it retains solid
investment-grade credit. FREE CASH   The Company generated positive free cash after dividends of $38.2 million in 2004, compared with
negative free cash of $475.4 million in 2003 and positive free cash of $131.7 million in 2002. The
increase in free cash in 2004, compared with 2003, was due largely to an increase in cash generated
by operating activities (as discussed previously) and decreased capital expenditures in 2004.
Negative free cash in 2003 resulted mainly from an extra pension funding payment of $300.0 million
in the fourth quarter of 2003 and lower net income and increased capital expenditures in 2003,
compared with 2002. CPR expects to generate free cash of $50 million to $100 million for the 2005 fiscal year, achieved
mainly with higher earnings and lower restructuring payments, partially offset by an increase in
capital expenditures.
    2004 Annual Report
    
    
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The Companys capital spending outlook is based on certain assumptions about events and
developments that may not materialize or that may be offset entirely or partially by other events
and developments. CPRs free cash
 outlook relies on the assumptions established for earnings and
capital expenditures, which were discussed previously in this MD&A under the
sub-heading Revenues, and
 under the headings Operating Expenses, Before Other Specified Items,
Other Income Statement Items and Liquidity and Capital Resources.
   CALCULATION OF FREE CASH(reconciliation of free cash to GAAP cash position)  For the year ended December 31 (in millions) (unaudited)
    
    2004
    
    
    2003 (1)
    
    
    2002 (1)Cash provided by operating activities
    
    $
    786.0
    
    
    $
    305.7
    
    
    $
    763.5Cash used in investing activities
    
    
    (666.1
    )
    
    
    (700.3
    )
    
    
    (551.0
    )Dividends paid on Common Shares
    
    
    (81.7
    )
    
    
    (80.8
    )
    
    
    (80.8
    )Free cash (2)
    
    
    38.2
    
    
    
    (475.4
    )
    
    
    131.7Cash provided by (used in) financing activities, before
dividend payment
    
    
    180.1
    
    
    
    325.2
    
    
    
    (403.7
    )Increase (decrease) in cash, as shown
on the Statement of Consolidated Cash Flows
    
    
    218.3
    
    
    
    (150.2
    )
    
    
    (272.0
    )Net cash at beginning of period
    
    
    134.7
    
    
    
    284.9
    
    
    
    556.9Net cash at end of period
    
    $
    353.0
    
    
    $
    134.7
    
    
    $
    284.9
 (1)
 (2)
  balance sheet Assets totalled $10,499.8 million at December 31, 2004, compared with $9,956.7 million at
December 31, 2003, and $9,664.3 million at December 31, 2002. The increase in 2004, compared with
2003, was mainly due to capital additions, most of which were locomotives and track replacement
programs, and a larger cash balance from debt issuance in the first quarter of 2004. The increase
in assets in 2003, compared with 2002, was mainly due to capital additions for locomotives and
track replacement programs, and a larger pension asset from additional funding during 2003. CPRs combined short-term and long-term liabilities were $6,517.4 million at December 31, 2004,
compared with total liabilities of $6,302.1 million
 at December 31, 2003, and $6,296.0 million at December 31, 2002. The increases were mainly due to
higher accrued payroll liabilities, most of which were for a more normal level of incentive
compensation, and larger future income tax balances resulting from tax rate increases by the
Province of Ontario. Trade accounts payable also increased, mainly for amounts owing to other
railways for transporting CPR customers freight. At December 31, 2004, the Companys Consolidated Balance Sheet reflected $3,982.4 million in
equity, compared with equity balances of $3,654.6 million and $3,368.3 million at December 31, 2003
and 2002, respectively. The majority of the increases were due to CPRs growth in retained income
in 2004 and 2003.
 SHARE CAPITAL   CPR also has a Management Stock Option Incentive Plan (MSOIP) under which key officers and
employees are granted options to purchase CPR shares. Each option granted can be exercised for one
Common Share. CPR has authorized a maximum of 11.0 million Common Shares for issuance under the
MSOIP. At December 31, 2004, 7.6 million of these options were outstanding.
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On July 21, 2003, CPRs Board of Directors suspended the Companys Directors Stock Option Plan
(DSOP), under which members of the Board of Directors were granted options to purchase CPR
shares. The DSOP allowed each option granted to be exercised for one Common Share. The maximum
number of Common Shares approved for issuance under the DSOP was 500,000. Outstanding options
granted prior to suspension of the DSOP remain in effect with no amendments. At December 31, 2004,
160,000 of these options remained in effect. The DSOP was suspended as a result of a review by
external
 compensation consultants of the Companys compensation philosophy for its Board of Directors. DIVIDENDS  Declared Dividends and Dividend Policy
 and the declaration of dividends is wholly within the Board of Directors discretion. Further, the
Board of Directors may cease declaring dividends or may declare dividends in amounts that are
different from those previously declared. Restrictions in the credit or financing agreements
entered into by the Company or the provisions of applicable law may preclude the payment of
dividends in certain circumstances. The details of dividends declared by the Board of Directors since the initial listing of CPRs
Common Shares on the Toronto and New York stock exchanges in October 2001 are as follows:
   Dividend amount
    
    Record date
    
    Payment date$0.1275
    
    December 27, 2001
    
    January 28, 2002$0.1275
    
    March 27, 2002
    
    April 29, 2002$0.1275
    
    June 27, 2002
    
    July 29, 2002$0.1275
    
    September 27, 2002
    
    October 28, 2002$0.1275
    
    December 27, 2002
    
    January 27, 2003$0.1275
    
    March 28, 2003
    
    April 28, 2003$0.1275
    
    June 27, 2003
    
    July 28, 2003$0.1275
    
    September 26, 2003
    
    October 27, 2003$0.1275
    
    December 24, 2003
    
    January 26, 2004$0.1275
    
    March 26, 2004
    
    April 26, 2004$0.1275
    
    June 25, 2004
    
    July 26, 2004$0.1325
    
    September 24, 2004
    
    October 25, 2004$0.1325
    
    December 31, 2004
    
    January 31, 2005$0.1325
    
    March 25, 2005
    
    April 25, 2005
  financial instruments The Companys policy with respect to hedging of risk exposure is to selectively reduce
volatility associated with fluctuations in interest and foreign exchange rates and in the price of
diesel fuel. CPRs policy is to prohibit the utilization of derivative financial and commodity
instruments for trading or speculative purposes.
 INTEREST RATE MANAGEMENT
 rate swaps, bond forwards and interest rate locks as part of its interest rate risk management
strategy. Interest Rate Swaps
    2004 Annual Report
    
    
    27




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quarterly based on the London Interbank Offered Rate (LIBOR). These swaps expire in 2011 and are
accounted for as a fair value hedge. Savings from these swaps reduced Interest Expense on the
Statement of Consolidated Income by $6.7 million in 2004. An unrealized gain of $8.8 million from
these interest rate swaps was calculated based on their fair value at December 31, 2004. The fair
value of these swaps has not been recorded on the Consolidated Balance Sheet. Swap, currency and
basis-spread curves from Reuters were utilized to establish the fair market value of the swaps.
Values may vary marginally due to either the terms of the contract or minor variations in the time
of day when the data was collected. Concurrent with the issuance of its 4.9 % $350-million Medium Term Notes in 2003, CPR entered into
cross-currency, fixed-to-floating interest rate swap agreements for the purpose of converting $105
million of fixed-rate debt to US$77.3 million of floating-rate U.S. dollar-denominated debt.
Beginning January 1, 2004, management determined that these agreements no longer qualified for
hedge accounting treatment under a new Canadian GAAP pronouncement, AcG 13, which is discussed
further under the heading Changes in Accounting Policy in this MD&A. The Companys unrealized
gain from these swaps is being amortized over the life of the debt. At December 31, 2004, Deferred
Liabilities on the Consolidated Balance Sheet included $1.8 million for this deferred gain.
Amortization of this gain reduced Other Charges on the Statement of Consolidated Income by $0.4
million in 2004. Other Charges also included the
additional costs or savings that arose when the swaps
 were settled. The Company recorded
savings of $1.5 million from these agreements in 2004. In July 2004, the Company terminated these
agreements and a loss of $2.2 million from this settlement was included in Other Charges. Interest Rate Locks   In 2003, CPR entered into six treasury rate locks totalling US$124 million to fix the benchmark
interest rate on the 5.41 % US$145-million Senior Secured Notes offering, maturing in 2024. Upon
termination of these locks in the first quarter of 2004, CPR realized a loss of $2.0 million, which
is being deferred and amortized over the 20-year life of the existing financing. At December 31,
2004, Other Assets and Deferred Charges on the Consolidated Balance Sheet included an unamortized
loss of $1.9 million from these agreements. Interest Expense on the 2004 Statement of
Consolidated Income included $0.1 million for amortization of this loss.
 At December 31, 2004, Other Assets and Deferred Charges on the Consolidated Balance Sheet
included an unamortized loss of $18.3 million from interest rate locks settled in 2003 on $200
million of long-term debt. The total loss is being amortized over seven years, which is the term of
the underlying debt. Interest Expense on the 2004 Statement of Consolidated Income included $3.3
million for amortization of this loss. At December 31, 2004, Deferred Liabilities on the Consolidated Balance Sheet included an
unamortized gain of $8.9 million from interest rate locks settled in 2003 on US$250 million of
long-term debt. The total gain is being amortized over 30 years, which is the term of the
underlying debt. Interest Expense on the 2004 Statement of Consolidated Income included $0.3
million for amortization of this gain. FOREIGN EXCHANGE MANAGEMENT   Foreign Exchange Forward Contracts
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    2004 Annual Report




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outstanding to be settled in 2005 and 2006. The unrealized gain on these forward contracts,
calculated using the trading value of the U.S. dollar on the New York Stock Exchange, was $0.2
million at December 31, 2004. No realized or unrealized gains or losses for these forwards were
included in CPRs financial statements at December 31, 2004. CPR also purchased forward contracts to manage some of its exposure to fluctuations related to
certain short-term commitments in U.S. dollars due to changes in exchange rates between Canadian
and U.S. dollars. These forward contracts were not designated as hedges. The contracts settled in
the second quarter of 2004. Other Charges on the 2004 Statement of Consolidated Income were
reduced by $1.8 million as a result of realized gains from these contracts. Cash Hedge   FUEL PRICE MANAGEMENT  Crude Oil Futures
 of fuel. The Company generally enters into commodity swap purchase contracts. These contracts are
marked-to-market every reporting period and the related unrealized gains or losses on these swaps
are deferred until the related fuel purchases are realized. An unrealized gain of $32.0 million was calculated based on the fair value of the swaps, which was
derived from the price of West Texas Intermediate (WTI), as quoted by recognized dealers or as
developed based upon the present value of expected future cash flows discounted at the applicable
U.S. Treasury Rate, LIBOR or swap spread. No unrealized gains or losses have been included in the
Companys financial statements in 2004. Fuel purchases and commodity swap contracts have an element of foreign exchange variability. The
Company uses from time to time foreign exchange forward contracts to manage this element of
fuel-price risk. The Company enters into purchase contracts of U.S. dollars because the Canadian
dollar cost of fuel increases if the U.S. dollar appreciates relative to the Canadian dollar. Gains
and losses on the crude oil swaps, coupled with foreign exchange forward contracts, offset
increases and decreases in the cash cost of fuel. An unrealized loss of $8.8 million related to forward purchases of U.S. dollars was calculated
based on the fair value of these forwards at December 31, 2004. Forward curves from Reuters were
utilized to establish the fair value. The unrealized loss has not been recorded in the Companys
financial statements in 2004. Fuel expense was reduced by $36.5 million in 2004 as a result of realized gains and losses arising
from settled swaps and collars. No amounts
 for the foreign exchange forwards have been included in the Companys financial statements for
2004, as none of the contracts has been realized. For every US$1 increase in the price of WTI, fuel expense, before hedging, will increase by
approximately $8 million, assuming current foreign exchange rates and fuel consumption levels. The
Company has fuel hedges for approximately 31 % of its fuel purchases in 2005, representing
unrealized gains of $17.9 million at December 31, 2004. off-balance sheet arrangements SALE OF ACCOUNTS RECEIVABLE
    2004 Annual Report
    
    
    29




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has a retained interest of approximately 15 % of receivables sold, which is recorded in Accounts Receivable on CPRs Consolidated Balance
Sheet. The Company cannot enter into an agreement with a third party with respect to its retained
interest. Receivables funded under the securitization program may not include delinquent, defaulted or
written-off receivables, nor receivables that do not meet certain obligor-specific criteria,
including concentrations in excess of prescribed limits. The Company maintains an adequate
allowance for doubtful accounts based on expected collectibility of accounts receivable. Credit
losses are based on specific identification of uncollectible accounts and the application of
historical percentages by aging category. At December 31, 2004,
allowances of $3.6 million (2003 
$5.6 million) were
 recorded in Accounts Receivable. In 2004, $2.8 million (2003  $1.1 million) of accounts
receivable were written off to Freight Revenues. The Company has retained the responsibility for servicing, administering and collecting freight
receivables sold. However, even though the Company acts as collector of all of the securitized
receivables, it has no claim against the trusts co-ownership interest in the securitized
receivables. No servicing asset or liability has been recorded, as the benefits CPR receives for
servicing the receivables approximate the related costs. Proceeds from collections reinvested in
the accounts receivable securitization program were $382.4 million in 2004. The securitization program is subject to standard reporting and credit-rating requirements for CPR
and includes a
 provision of a monthly portfolio report that the pool of eligible receivables satisfies
pre-established criteria that are reviewed and approved by Dominion Bond Rating Services and are
standard for agreements of this nature. Failure to comply with these provisions would trigger
termination of the program. In the event the program is terminated prior to maturity, CPR expects
to have sufficient liquidity remaining in its revolving credit facility to meet its payment
obligations. The Company complied with all termination tests in 2004. contractual commitments The following table indicates CPRs known contractual obligations and commitments to make
future payments for contracts such as debt, capital lease arrangements and commercial commitments:
   Payments due by periodLess than
    
    
    1  3
    
    
    3  5
    
    
    AfterAt December 31, 2004 (in millions)
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsLong-term debt
    
    $
    3,014.9
    
    
    $
    271.0
    
    
    $
    185.8
    
    
    $
    39.0
    
    
    $
    2,519.1Capital lease obligations
    
    
    336.1
    
    
    
    4.7
    
    
    
    14.5
    
    
    
    17.2
    
    
    
    299.7Operating lease obligations (1)
    
    
    633.8
    
    
    
    146.7
    
    
    
    215.9
    
    
    
    112.4
    
    
    
    158.8Supplier purchase obligations
    
    
    603.1
    
    
    
    94.8
    
    
    
    158.9
    
    
    
    119.9
    
    
    
    229.5Other long-term liabilities reflected on the
Companys Consolidated Balance Sheet (2)
    
    
    953.6
    
    
    
    120.2
    
    
    
    227.8
    
    
    
    231.1
    
    
    
    374.5Total contractual obligations
    
    $
    5,541.5
    
    
    $
    637.4
    
    
    $
    802.9
    
    
    $
    519.6
    
    
    $
    3,581.6
 (1)
 (2)
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    2004 Annual Report




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foreign exchange   The Canadian dollar strengthened against the U.S. dollar by approximately
8 % year-over-year in 2004, compared with 2003. The impact of this foreign exchange rate
fluctuation on the Companys financial results is reflected on the Statement of Consolidated Income
and the Consolidated Balance Sheet, net of the hedge discussed above. TRANSLATION OF THE
COMPANYSACCOUNTS, EXCLUDING FOREIGN SUBSIDIARIES   U.S. dollar-denominated Consolidated Balance Sheet accounts are translated into Canadian dollars at
the period-end exchange rate for monetary items such as working capital, long-term debt and cash,
and at historical exchange rates for non-monetary items. Unrealized gains and losses arising from
the translation of the monetary items are included in
 income immediately in Other Charges, and as Foreign Exchange Gains (Losses) on Long-Term Debt
for U.S. dollar-denominated long-term debt. TRANSLATION OF FOREIGN SUBSIDIARIES ACCOUNTS   future trends, commitments and risks CAPACITY CHALLENGES
 highly disciplined scheduled operating practices to increase productivity and efficiency. CPR is
also employing a capacity allocation system for the rapidly expanding import container business on
the Canadian West Coast and has entered into joint railway agreements that will improve capacity
and service levels in the Vancouver area. CPR is considering a phased infrastructure expansion
program that would increase network capacity in increments, beginning with the corridor west of
Moose Jaw, Saskatchewan. The phased approach would enable CPR to expand with the rate of traffic
growth, helping CPR derive maximum value from its investment, or to delay or reduce the scope of
the phases as capacity improves on the existing network. However, network expansion will only begin
should several preconditions be met, including the sustainability of traffic growth, improved
margins and regulatory stability. COMPANY GROWTH AND FLEXIBILITY   In 2005, CPR will continue its focus on revenue growth and cost reduction as well as improved
utilization of its asset base. Targeted initiatives and price improvements are expected to drive
revenue growth, including growth from value-added services provided by Canadian Pacific Logistics
Solutions, CPRs logistics and supply chain division.
    2004 Annual Report
    
    
    31




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CPR anticipates continued revenue gains in bulk commodities, assuming global demand remains strong. CPRs traffic volumes and revenues are largely dependent upon the health and growth of the North
American and global economies, exchange rates, and other factors affecting the volume and patterns
of international trade. CPRs future grain transportation revenues may be negatively affected if
there is a recurrence of drought conditions that existed in its grain collection areas in 2001,
2002 and the first half of 2003. CPR will attempt to mitigate the effects of any downward pressure
on transportation revenues primarily through cost-containment measures. Continuing cost-containment programs are vital to CPR achieving its financial performance targets.
CPR plans to eliminate approximately 175 job positions in 2005 as a result of previously announced
initiatives designed to achieve cost reductions through consolidation and rationalization of
administrative functions, redesign of yard processes and more efficient maintenance of freight car
and locomotive fleets. CPR will continue to selectively hire in specific areas of the business, as
required by growth or changes in traffic patterns. Improved asset utilization is expected to result from further railcar modernization and from recent
investments in information technology. Overall, the rail industry is continuing to leverage
information technology to facilitate its dealings with suppliers and shippers. CPRs ongoing
strategy is to apply information technology to improve its competitive position.
 CPRs covered hopper car fleet consists of a mixture of owned and leased cars. A portion of the
fleet used for the export of grain is leased from the Government of Canada, which has indicated a
desire to sell or otherwise dispose of its cars. The potential impact of this on CPRs grain
business cannot be ascertained until the governments decision is announced. However, in the event
of a disposition, CPR has advocated a process that is market-driven and open to all interested
parties. CRUDE OIL PRICES
 BORDER SECURITY   CPR works closely with Canadian and U.S. customs officials and with other railways to ensure the
safe and secure movement of goods between Canada and the U.S. The Company implemented several
regulatory security frameworks in 2004 that focused on the provision of advanced electronic cargo
information. CPR is fully automated with both CBSA and CBP and provides the requisite shipment
information electronically, well in advance of border arrival. Under the joint Declaration of Principles signed in April 2003, CPR committed to work with CBSA and
CBP to install a new Vehicle and Cargo Inspection System (VACIS) at five of CPRs border
crossings. Rail VACIS systems use non-intrusive gamma ray technology to scan U.S.-bound rail
shipments. Four of the VACIS systems are now fully operational and CPR is currently working with
CBP and CBSA on the fifth installation, located in Windsor, Ontario, which is expected to be
complete by the third quarter of 2005. The Government of Canada and CPR have each committed up to
$4.1 million to secure the rail corridor between the Windsor VACIS facility and the U.S. border.
This joint government-industry initiative is expected to enhance the security of
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U.S.-bound rail shipments while helping to ensure uninterrupted access to the U.S. market for CPR
customers. LABOUR RELATIONS   The Teamsters Canada Rail Conference, Maintenance of Way Employees Division (TCRC-MWD) was
certified in July 2004 as bargaining agent for employees who maintain CPRs track. The Companys
collective agreement with the former bargaining agent expired on December 31, 2003. A Memorandum of
Settlement for a three-year collective agreement extending to the end of 2006 was achieved with the
TCRC-MWD on January 14, 2005, and is currently being voted upon by employees. CPRs collective agreement with the Canadian Auto Workers (CAW), which represent employees who
maintain and repair locomotives and freight cars, expired on December 31, 2004. A Memorandum of
Settlement for a three-year collective agreement extending to the end of 2007 was achieved on
February 11, 2005, and is being voted upon by employees. Negotiations commenced in September 2004 with the International Brotherhood of Electrical Workers (IBEW), which represents
signal maintainers. CPRs collective agreement
 with the IBEW expired at the end of 2004. Negotiations are continuing. The Company is preparing for negotiations with the Rail Canada Traffic Controllers and the Canadian
Pacific Police Association that are scheduled to commence in September 2005. In the U.S., CPR is party to collective agreements with 29 bargaining units: 15 on its Soo Line
Railroad (Soo Line) subsidiary and 14 on its Delaware and Hudson Railway (D&H) subsidiary. Soo Line has renewed agreements with seven unions representing track maintainers, freight car
repair employees, clerks, train dispatchers, signal repair employees, machinists and conductors.
Tentative settlements have been reached with two other bargaining units, which represent
electricians and communication workers, and yard supervisors. Negotiations are continuing with the
six remaining bargaining units, which represent locomotive and car foremen, mechanical labourers,
blacksmiths and boilermakers, sheet metal workers, police, and locomotive engineers. Negotiations
with the Teamsters, representing locomotive engineers, are being assisted through mediation. D&H has renewed agreements with five unions representing freight car repair employees, clerks,
locomotive engineers, signal repair employees and mechanical supervisors. Negotiations are continuing with the remaining nine bargaining units, which represent track
maintainers, conductors and trainpersons, engineering supervisors, machinists, yard supervisors,
electricians, labourers, police, and pipefitters.
 ENVIRONMENTAL   CPR has developed specific environmental programs to address areas such as air emissions,
wastewater, management of vegetation, chemicals and waste, storage tanks and fuelling facilities,
and environmental impact assessment. In addition, CPR continues to focus on preventing spills and
other incidents that have a negative impact on the environment. As a precaution, the Company has
established a Strategic Emergency Response Contractor network and located spill equipment kits
across Canada and the U.S. to ensure a rapid and efficient response in the event of an
environmental incident. CPR also regularly updates and tests emergency preparedness and response
plans. CPR has developed an environmental audit program that comprehensively, systematically and regularly
assesses CPRs facilities for compliance with legal requirements and conformance of CPRs policies
to accepted industry standards. Audits are followed by a formal Corrective Action Planning process
to ensure findings are addressed in a timely manner. In addition, CPRs Board of Directors has
established an Environmental and
    2004 Annual Report
    
    
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Safety Committee, which conducts a semi-annual comprehensive review of environmental issues. In the fourth quarter of 2004, the Company recorded a $90.9-million charge for costs associated
with investigation, characterization, remediation and other applicable actions related to
environmental contamination at a property in Minnesota, which includes areas previously leased to
third parties. CPR is participating in the State of Minnesotas voluntary investigation and
clean-up program at the east side of the property. The property is the subject of ongoing fieldwork
being undertaken in conjunction with the appropriate State of Minnesota authorities to determine
the extent and magnitude of the contamination and the appropriate remediation plan. CPR now has
sufficient information to reasonably estimate clean-up and other applicable costs for the entire
property. CPR expects to file with the State of Minnesota in 2005 a response action plan for the
east side of the property. The charge was taken in the fourth quarter of 2004 because future liability increases for this
property became probable and subject to reasonable estimation, in accordance with applicable
accounting standards, based on the present scientific and engineering knowledge about the property.
The estimate may change as new information becomes available or new developments occur. The costs
are expected to be incurred over approximately 10 years. CPR has initiated litigation against two former lessees that it believes are responsible for a
large portion of the contamination. Under applicable accounting rules, no recovery has
 been accrued since any recovery is dependent upon the outcome of the lawsuit, which at present is
scheduled for trial in 2007. AGREEMENTS AND CONTRACT NEGOTIATIONS
 implementation of the agreements and the trackage rights between Detroit and Chicago will improve
the profitability of CPRs operations in the northeastern U.S., and reduce costs and significantly
improve service in the Detroit-Chicago corridor. These savings are expected to be realized
beginning in 2005. Coal shipper Elk Valley Coal Corporation (EVCC), pursuant to the rules of the Canadian
Transportation Agency (CTA), referred the matter of rates and services for the transportation by
CPR of coal from EVCCs Elkview mine in southeastern B.C. to the Port of Vancouver to an
independent arbitrator. Notwithstanding that CPR maintains that this matter is governed by a
confidential contract, which CPR claims governs the movement of coal from all five of EVCCs mines
in southeastern B.C., the arbitrator ruled in CPRs favour. In a closely related matter, CPR has
filed a statement of claim against EVCC in respect of all five mines for failure to pay applicable
rail freight charges in accordance with the confidential contract. In January 2005, EVCC and CPR
agreed to suspend all legal proceedings and entered into non-binding mediation in an attempt to
resolve all disputes between the parties. The disputes are not expected to affect the continued
shipment of coal by CPR from EVCCs mines. The outcome of this matter could have a material impact
on CPRs revenues and financial position. PENSION PLAN DEFICIT
    34
    
    
    2004 Annual Report




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##### Table of Contents



pension obligation is discounted using a discount rate that is a blended interest rate of
high-quality corporate debt instruments. The discount rate is one of the factors that can influence
a plans deficit. Other factors include the actual return earned on the assets and rates used,
based on managements best estimates, for future salary increases and inflation. For example, every
1.0 percentage point the actual discount rate varies above (or below) the estimated discount rate
can cause the deficit to decrease (or increase) by approximately $600 million, after reflecting the
expected loss (gain) on the value of the pension funds debt securities with respect to
corresponding changes in long-term interest rates. Similarly, every 1.0 percentage point the actual
return on assets varies above (or below) the estimated return for the year can cause the deficit to
decrease (or increase) by approximately $60 million. Adverse experience with respect to these
factors could eventually increase funding and pension expense significantly, while favourable
experience with respect to these factors could eventually decrease funding and pension expense
significantly.
 Between 51 % and 57 % of the plans assets are invested in equity securities. As a result, stock
market performance is the key driver in determining the pension funds asset performance. Most of
the plans remaining assets are invested in debt securities, which, as mentioned above, provide a
partial offset to the increase (or decrease) in CPRs pension deficit caused by decreases (or
increases) in the discount rate. The deficit will fluctuate according to future market conditions and funding will be revised as
necessary to reflect such fluctuations. The Company will continue to make contributions towards
this deficit that, as a minimum, meet requirements as prescribed by Canadian pension supervisory
authorities. The Company made contributions of $175.7 million to the defined benefit pension plans in 2004. The
2004 contribution amount reflected the Companys decision to treat the voluntary extra contribution
of $300.0 million made in December 2003 as a prepayment of contributions for 2004, 2005 and 2006.
 The last actuarial valuation of CPRs main pension plan was completed as at January 1, 2004. The
Company is currently undergoing an updated actuarial valuation of this plan as at January 1, 2005
(which will be completed by June 2005) and also expects to undergo an updated actuarial valuation
as at January 1, 2006. The Company expects its pension contributions in 2005 and 2006 to be
approximately $300 million for the two years combined, with at least $60 million of this total
contributed in 2005. In deriving these amounts, the Company took into account the estimated impact
of both of these valuations, along with other factors. The actual amount required to be contributed
in 2005 and 2006 will also depend on CPRs actual experience in 2005 with such variables as
investment returns, interest rate fluctuations and demographic changes. FINANCIAL COMMITMENTS
   Certain Other Financial Commitments  Amount of commitment per period2006
    
    
    2008
    
    
    2010At December 31, 2004 (in millions)
    
    Total
    
    
    2005
    
    
    & 2007
    
    
    & 2009
    
    
    & beyondLetters of credit
    
    $
    314.9
    
    
    $
    314.9
    
    
    $
    
    
    
    $
    
    
    
    $
    Surety bonds
    
    
    22.1
    
    
    
    22.1
    
    
    
    
    
    
    
    
    
    
    
    Capital commitments (1)
    
    
    577.3
    
    
    
    307.2
    
    
    
    68.2
    
    
    
    72.1
    
    
    
    129.8Offset financial liability
    
    
    159.6
    
    
    
    159.6
    
    
    
    
    
    
    
    
    
    
    
    Total commitments
    
    $
    1,073.9
    
    
    $
    803.8
    
    
    $
    68.2
    
    
    $
    72.1
    
    
    $
    129.8
 (1)
  2004 Annual Report
    
    
    35




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Letters of Credit and Surety Bonds   Capital Commitments   Offset Financial Liability
 RESTRUCTURING   Productivity improvements stemming from these job eliminations are expected to reduce compensation
and benefits expense by approximately $58 million in 2005 and $67 million annually in future years,
compared with 2002, which was the last full year prior to the start of the restructuring program.
Job reductions associated with the restructuring program contributed $36 million in savings in 2004
(compared with $35 million in anticipated savings in 2004), including $11 million in the fourth
quarter. Cash payments for the elimination of these positions are expected to be $13 million in 2005, $9
million in 2006 and a total of $19 million in the remaining years to 2010. CPR expects to fund
these payments from general operations. The restructuring liabilities also include residual payments to protected employees for previous
restructuring plans that are substantially complete.
 These payments are expected to continue in decreasing amounts until 2025 and will be funded from
CPRs general operations. CPR had cash payments related to severance under all restructuring initiatives and to CPRs
environmental remediation program, described in this MD&A under the sub-heading Critical
Accounting Estimates, totalling $88.8 million in 2004, compared with $107.0 million in 2003 and
$119.3 million in 2002. Payments in 2005 are estimated to be $80 million to $90 million. The total accrued restructuring and environmental liability included in CPRs Consolidated Balance
Sheet at December 31, 2004, was $448.7 million, of which $95.0 million was included in Accounts
Payable and $353.7 million was included in Deferred Liabilities. The total liability included restructuring liabilities of $275.8 million at December 31, 2004,
compared with $367.4 million at December 31, 2003. Labour liabilities totalling $269.7 million were included in total restructuring liabilities of
$275.8 million at December 31, 2004. Labour liabilities totalling $358.2 million were included in
total restructuring liabilities of $367.4 million at December 31, 2003. In 2004, payments made for all restructuring liabilities amounted to $65.5 million, compared with
payments of $86.8 million in 2003.
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    2004 Annual Report




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Payments in 2004 relating to the labour liabilities were $62.2 million, compared with $78.4 million
in 2003. Also included in the restructuring liabilities were accruals for costs associated with the rental
of properties no longer being used by the Company. Cash payments for these liabilities are
anticipated to be $1.2 million in 2005. In 2004, payments relating to these liabilities were $2.8
million. critical accounting estimates To prepare financial statements that conform with Canadian GAAP, management is required to make
estimates and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period. Using the most current
information available, management reviews its estimates on an ongoing basis, including those
related to environmental liabilities, pensions and other benefits, property, plant and equipment,
future income taxes, and legal and personal injury liabilities. The development, selection and disclosure of these estimates, as well as this MD&A, have been
reviewed by the Board of Directors Audit, Finance and Risk Management Committee, which is
comprised entirely of independent directors. ENVIRONMENTAL LIABILITIES
 classified according to typical activities and scale of operations conducted, and remediation
strategies are developed 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. Management also considers 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. CPR is committed to fully meeting
its regulatory and legal obligations with respect to environmental matters. Liabilities for environmental remediation may change from time to time as new information about
previously untested sites becomes known. The net liability may also vary as the courts decide legal
proceedings against outside parties responsible for contamination. These potential charges, which
cannot be quantified at this time, are not expected to be material to the Companys financial
position, but may materially affect income in the period in which the charge is recognized.
Increased costs would be reflected as increases to Deferred Liabilities on CPRs Consolidated
Balance Sheet and to Purchased Services and Other on CPRs Statement of Consolidated Income.
Favourable court settlements would increase Accounts Receivable on
 CPRs Consolidated Balance Sheet and decrease operating expenses. In 2004, environmental liabilities were increased by $101.0 million, largely due to a $90.9-million
charge for a property in Minnesota, as discussed under the heading Future Trends, Commitments and
Risks in this MD&A. In 2003, the liabilities increased by $5.5 million as the accruals were
adjusted for various sites in the multi-year soil remediation program. At December 31, 2004, the accrual for environmental remediation on CPRs Consolidated Balance Sheet
amounted to $172.9 million, of which the long-term portion amounting to $149.9 million was included
in Deferred Liabilities and the short-term portion amounting to $23.0 million was included in
Accounts Payable and Accrued Liabilities. Costs incurred under CPRs environmental remediation
program are charged against the accrual. Total payments were $23.3 million in 2004. The U.S.
dollar-denominated portion of the liability was affected by Foreign Exchange, resulting in an
increase in environmental liabilities of $0.4 million in 2004. PENSIONS AND OTHER BENEFITS
    2004 Annual Report
    
    
    37




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uncertainties, as described under the sub-heading Pension Plan Deficit. Pension costs are actuarially determined using the projected-benefit method prorated over the
credited service periods of employees. This method incorporates managements best estimate of
expected plan investment performance, salary escalation and retirement ages of employees. The
expected return on fund assets is calculated using market-related asset values developed from a
five-year average of market values for the funds 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 funds fixed income and real estate securities. The discount rate used
to determine the benefit obligation is based on market interest rates on high-quality corporate
debt instruments with matching cash flows. Unrecognized actuarial gains and losses in excess of 10
% of the greater of the benefit obligation and the market-related value of plan assets are
amortized over the expected average remaining service period of active employees expected to
receive benefits under the plan (approximately 12 years). Prior service costs arising from plan
amendments are amortized over the expected average remaining service period of active employees who
were expected to receive benefits under the plan at the date of amendment. A transitional asset and
obligation arising from implementing the CICA Accounting Standard Section 3461 Employee Future
Benefits, effective January 1, 2000, is being amortized
 over the expected average remaining service period of active employees who were expected to receive
benefits under the plan at January 1, 2000 (approximately 13 years). Other Assets and Deferred Charges on CPRs December 31, 2004, Consolidated Balance Sheet included
prepaid pension costs of $838.3 million. This accrued benefit asset is increased by amounts
contributed to the plans by the Company, offset by the amount of pension expense for the year, with
the major influence being the amount of the contributions. CPRs Consolidated Balance Sheet also
included $4.5 million in Accounts Receivable for prepaid pension costs, and $0.3 million in
Accounts Payable and Accrued Liabilities and $1.9 million in Deferred Liabilities for pension
obligations. The obligations with respect to post-retirement benefits, including health care, workers
compensation in Canada and life insurance, are actuarially determined and accrued using the
projected-benefit method prorated over the credited service periods of employees. Fluctuations in
the post-retirement benefit obligation are caused by changes in the discount rate used. A 1.0
percentage point increase (decrease) in the discount rate would decrease (increase) the liability
by approximately $50 million. Post-retirement benefits accruals of $147.3 million were included in
Deferred Liabilities, and post-retirement benefits accruals of $3.7 million were included in
Accounts Payable and Accrued Liabilities on CPRs December 31, 2004, Consolidated Balance Sheet.
 Pension and post-retirement benefits expenses (excluding workers compensation benefits) were
included in Compensation and Benefits on CPRs December 31, 2004, Statement of Consolidated
Income. In 2004, pension expense was $28.0 million, consisting of defined benefit pension expense
of $25.1 million plus defined contribution pension expense (equal to contributions) of $2.9
million. Post-retirement benefits expense in 2004 was $40.8 million, resulting in combined pension
and post-retirement benefits expenses of $68.8 million for the year. PROPERTY, PLANT AND EQUIPMENT   Depreciation represents a significant part of the Companys operating expenses. The estimated
useful lives of properties have a direct impact on the amount of depreciation expense charged by
the Company and the amount of accumulated depreciation recorded as a component of Net Properties
on CPRs December 31, 2004, Consolidated Balance Sheet. Depreciation expense relating to properties
amounted to $407.1 million in 2004. At December 31, 2004, accumulated depreciation was $4,482.6
million. Revisions to the estimated useful lives and net salvage projections for properties constitute a
change in accounting estimate and are dealt with prospectively by amending
    38
    
    
    2004 Annual Report




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depreciation rates. It is anticipated that there will be changes in the weighted average useful
life and salvage estimates for each property group as assets are acquired, used and retired.
Significant changes in either the useful lives of properties or the salvage assumptions could
result in material changes to depreciation expense. For example, if the estimated average life of
road locomotives, the Companys largest asset group, increased (or decreased) by 5 %, annual
depreciation expense would decrease (or increase) by approximately $3 million. CPR undertakes regular depreciation studies to establish the estimated useful life of each property
group and is currently undergoing a depreciation review of certain track-related properties in 2004
that could result in changes to the estimated useful lives and salvage rates of these assets.
Estimated service lives and salvage rates are based on historical retirement records whenever
feasible. In cases where there are new asset types or there is insufficient retirement experience,
the depreciation lives and salvage parameters are based on engineering or other expert opinions in
the field. In 2004, depreciation expense increased $23 million due to rate revisions for
track-related assets. In the first quarter of 2004, the Company adopted the CICA accounting standard for Asset Retirement
Obligations, discussed previously in CPRs first-quarter 2004 MD&A. This standard does not allow
the Companys previous practice of
 recognizing removal costs in excess of salvage proceeds over the life of the asset when the removal
of the asset is not a legal obligation. Adopting this standard retroactively resulted in a decrease
in depreciation expense of $9.0 million in 2004 and $9.2 million in 2003. FUTURE INCOME TAXES   In determining its future income taxes, the Company makes estimates and assumptions regarding
future tax matters, including estimating the timing of the realization and settlement of future
income tax assets (including the benefit of tax losses) and liabilities. Future income taxes are
calculated using the current substantively enacted federal and provincial future income tax rates,
which may differ in future periods. Future income tax expense totalling $131.5 million was included in income taxes for 2004. At
December 31, 2004, future income tax liabilities of $1,386.1 million were recorded as
 a long-term liability, comprised largely of temporary differences related to accounting for
properties. Future income tax benefits of $70.2 million realizable within one year were recorded as
a current asset. The Company believes that its future income tax provisions are adequate. As discussed in the section Other Income Statement Items, under the sub-heading Income Taxes,
future income tax expense and liability were adjusted in 2003 by an increase of $52.7 million to
reflect the new Government of Ontario income tax rates, and by a decrease of $59.3 million as a
result of the revaluation of several components of the future income tax liability. LEGAL AND PERSONAL INJURY LIABILITIES   These estimates are determined on a case-by-case basis. They are based on CPRs assessment of the
actual damages incurred, current legal advice with respect to the expected outcome of the legal
action, and actuarially determined assessments with respect to settlements in other similar cases.
CPR employs experienced claims adjusters who investigate and assess the validity of individual
claims made against the Company and estimate the damages incurred.
    2004 Annual Report
    
    
    39




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A provision for incidents, claims or litigation is recorded, based on the facts and circumstances
known at the time. CPR accrues for likely claims when the facts of an incident become known and
investigation results provide a reasonable basis for estimating the liability. The lower end of the
range is accrued if the facts and circumstances permit only a range of reasonable estimates and no
single amount in that range is a better estimate than any other. Additionally, for administrative
expediency, the Company keeps a general provision for lesser-value injury cases. Facts and
circumstances related to asserted claims can change, and a process is in place to monitor accruals
for changes in accounting estimates. With respect to claims related to occupational health and safety in the provinces of Quebec,
Ontario, Manitoba and British Columbia, estimates administered through the Workers Compensation
Board (WCB) are actuarially determined. In the provinces of Saskatchewan and Alberta, CPR is
assessed for an annual WCB contribution. As a result, this amount is not subject to estimation by
management. Railway employees in the U.S. are not covered by a workers compensation program. CPR manages
workers compensation claims in the U.S. using a case-by-case comprehensive approach, rather than
the statistical-estimate approach used by many Class 1 railways. The case-by-case approach is an
appropriate method with the relatively lower case load due to CPRs smaller U.S. employee base.
 Provisions for incidents, claims and litigation charged to income are included in Purchased
Services and Other on CPRs Consolidated Statement of Income and amounted to $53.6 million in
2004. Accruals for incidents, claims and litigation, including WCB accruals, totalled $159.9 million, net
of insurance recoveries, at December 31, 2004. The total accrual included $111.9 million in
Deferred Liabilities and $85.6 million in Accounts Payable and Accrued Liabilities, offset by
$30.0 million in Other Assets and Deferred Charges and $7.6 million in Accounts Receivable. systems, procedures and controls Management is responsible for establishing appropriate information systems, procedures and
controls to ensure that all financial information disclosed externally, including this MD&A, and
used internally by management is complete and reliable. These procedures include a review of the
financial statements and associated information, including this MD&A, by the Audit, Finance and
Risk Management Committee of the Board of Directors. The Companys Chief Executive Officer and
Chief Financial Officer have a process to evaluate the applicable systems, procedures and controls
and are satisfied they are adequate for ensuring that complete and reliable financial information
is produced.
 forward-looking information This MD&A contains certain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995(United States) relating but not limited to CPRs
operations, anticipated financial performance, business prospects and strategies. Forward-looking
information typically contains statements with words such as anticipate, believe, expect,
plan or similar words suggesting future outcomes. Readers are cautioned to not place undue reliance on forward-looking information because it is
possible that predictions, forecasts, projections and other forms of forward-looking information
will not be achieved by CPR. In addition, CPR undertakes no obligation to update publicly or
otherwise revise any forward-looking information, whether as a result of new information, future
events or otherwise. By its nature, CPRs forward-looking information involves numerous assumptions, inherent risks and
uncertainties, including but not limited to the following factors: changes in business strategies;
general global economic and business conditions; the availability and price of energy commodities;
the effects of competition and pricing pressures; industry overcapacity; shifts in market demands;
changes in laws and regulations; potential increases in maintenance and operating costs;
uncertainties of litigation; labour disputes; timing of completion of
    40
    
    
    2004 Annual Report




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capital and maintenance projects; currency and interest rate fluctuations; effects of changes in
market conditions on the financial position of pension plans; various events that could disrupt
operations, including severe weather conditions; and technological changes. The performance of the North American and global economies remains uncertain. Grain production and
yield in Canada improved in the most recent crop year, after a period of significant
drought-induced decline. However, factors over which CPR has no control, such as weather conditions
and insect populations, affect crop production and yield in CPRs grain collection areas. Fuel
prices also remain uncertain, as they are influenced by many factors, including, without
limitation, worldwide oil demand, international politics, labour and political instability in major
oil-producing countries and the ability of these countries to comply with agreed-upon production
quotas. The Company intends to continue its fuel
 hedging and fuel surcharge programs to attempt to offset the effects of high crude oil prices. The sustainability of recent increases in the value of the Canadian dollar relative to the U.S.
dollar is unpredictable, as the value of the Canadian dollar is affected by a number of domestic
and international factors, including, without limitation, economic performance, Canadian and
international monetary policies and U.S. debt levels. There is also continuing uncertainty with respect to security issues involving the transportation
of goods in populous areas of the U.S. and Canada and the protection of North Americas rail
infrastructure, including the movement of goods across the Canada-U.S. border. New rules governing railway mergers were established by the STB in 2001. The new rules have
broadened the scope of competition-enhancing conditions that the STB may impose
 in connection with railway mergers and will likely result in increased scrutiny by the STB of
proposed railway mergers. In Canada, draft legislation prepared following the federal governments 2001 review of the Canada
Transportation Actdid not proceed when Parliament terminated its session in late 2003. The federal
government did not reintroduce the draft legislation in 2004. The legislative review did affirm the
importance of market forces in achieving a viable, sustainable rail industry. In addition to the foregoing general factors, there are more specific factors that could cause
actual results to differ from those described in the forward-looking statements contained in this
MD&A. These more specific factors are identified and discussed in the Future Trends, Commitments
and Risks section and elsewhere in this MD&A with the particular forward-looking statement in
question.
    2004 Annual Report
    
    
    41




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##### Table of Contents



managements
responsibility for financial reporting
    The information in this Annual Report is the responsibility of management. The consolidated
financial statements have been prepared by management in accordance with Canadian generally
accepted accounting principles and include some amounts based on managements best estimates and
careful judgment. Management maintains a system of internal accounting controls to provide reasonable assurance that
assets are safeguarded and that transactions are
 authorized, recorded and reported properly. The internal audit department reviews these accounting
controls on an ongoing basis and reports its findings and recommendations to management and the
Audit, Finance and Risk Management Committee of the Board of Directors. The Board of Directors carries out its responsibility for the consolidated financial statements
principally through its Audit, Finance and Risk Management Committee, consisting
 of five members, all of whom are outside directors. This Committee reviews the consolidated
financial statements with management and the independent auditors prior to submission to the Board
for approval It also reviews the recommendations of both the independent and internal auditors for
improvements to internal controls, as well as the actions of management to implement such
recommendations.
     -s- Michael T. Waites
    
    -s- Robert J. RitchieMICHAEL T. WAITES
    
    ROBERT J. RITCHIEExecutive Vice-President
    
    President and Chief Executive Officerand Chief Financial OfficerFebruary 21, 2005
    42
    
    
    2004 Annual Report




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##### Table of Contents



auditors report  TO THE SHAREHOLDERS OF
CANADIAN PACIFIC RAILWAY LIMITED   We conducted our audits in accordance with generally accepted auditing standards in Canada. Those
standards require that we plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement.
 An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the financial
position of Canadian Pacific Railway Limited as at December 31, 2004 and 2003, and the results of
its operations and its cash flows for each of the three years in the period ended December 31,
2004, in accordance with generally accepted accounting principles in Canada.
 COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE
     (PRICEWATERHOUSECOOPERS LLP)
    
    (PRICEWATERHOUSECOOPERS LLP)PRICEWATERHOUSECOOPERS LLP
    
    PRICEWATERHOUSECOOPERS LLPChartered Accountants
    
    Chartered AccountantsCalgary, Alberta
    
    Calgary, AlbertaFebruary 11, 2005
    
    February 11, 2005
    2004 Annual Report
    
    
    43




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##### Table of Contents



statement of consolidated income 2004
    
    
    2003
    
    
    2002(Restated 
    
    
    (Restated Year ended December 31 (in millions, except per share data)
    
    
    
    
    
    see Note 2)
    
    
    see Note 2)RevenuesFreight
    
    $
    3,728.8
    
    
    $
    3,479.3
    
    
    $
    3,471.9Other
    
    
    174.1
    
    
    
    181.4
    
    
    
    193.73,902.9
    
    
    
    3,660.7
    
    
    
    3,665.6Operating expensesCompensation and benefits
    
    
    1,259.6
    
    
    
    1,163.9
    
    
    
    1,143.4Fuel
    
    
    440.0
    
    
    
    393.6
    
    
    
    358.3Materials
    
    
    178.5
    
    
    
    179.2
    
    
    
    168.7Equipment rents
    
    
    218.5
    
    
    
    238.5
    
    
    
    255.4Depreciation and amortization
    
    
    407.1
    
    
    
    372.3
    
    
    
    340.2Purchased services and other
    
    
    610.7
    
    
    
    583.6
    
    
    
    555.63,114.4
    
    
    
    2,931.1
    
    
    
    2,821.6Operating income, before the following:
    
    
    788.5
    
    
    
    729.6
    
    
    
    844.0Special charge for environmental remediation (Note 3)
    
    
    90.9
    
    
    
    
    
    
    
    Special charge for labour restructuring and asset impairment (Note 4)
    
    
    (19.0
    )
    
    
    215.1
    
    
    
    Loss on transfer of assets to outsourcing firm (Note 12)
    
    
    
    
    
    
    28.9
    
    
    
    Operating income
    
    
    716.6
    
    
    
    485.6
    
    
    
    844.0Other charges (Note 5)
    
    
    36.1
    
    
    
    33.5
    
    
    
    21.8Foreign exchange gain on long-term debt
    
    
    (94.4
    )
    
    
    (209.5
    )
    
    
    (13.4
    )Interest expense (Note 6)
    
    
    218.6
    
    
    
    218.7
    
    
    
    242.2Income tax expense (Note 7)
    
    
    143.3
    
    
    
    41.6
    
    
    
    105.9Net income
    
    $
    413.0
    
    
    $
    401.3
    
    
    $
    487.5Basic earnings per share (Note 8)
    
    $
    2.60
    
    
    $
    2.53
    
    
    $
    3.08Diluted earnings per share (Note 8)
    
    $
    2.60
    
    
    $
    2.52
    
    
    $
    3.06
 
  44
    
    
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consolidated balance sheet 2004
    
    
    2003(Restated Year ended December 31 (in millions)
    
    
    
    
    
    see Note 2)AssetsCurrent assetsCash and short-term investments
    
    $
    353.0
    
    
    $
    134.7Accounts receivable (Note 9)
    
    
    434.7
    
    
    
    395.7Materials and supplies
    
    
    134.1
    
    
    
    106.4Future income taxes (Note 7)
    
    
    70.2
    
    
    
    87.4992.0
    
    
    
    724.2Investments (Note 11)
    
    
    96.0
    
    
    
    105.6Net properties (Note 12)
    
    
    8,393.5
    
    
    
    8,219.6Other assets and deferred charges (Note 13)
    
    
    1,018.3
    
    
    
    907.3Total assets
    
    $
    10,499.8
    
    
    $
    9,956.7Liabilities and shareholders equityCurrent liabilitiesAccounts payable and accrued liabilities
    
    $
    975.3
    
    
    $
    907.0Income and other taxes payable
    
    
    16.2
    
    
    
    13.5Dividends payable
    
    
    21.0
    
    
    
    20.2Long-term debt maturing within one year (Note 14)
    
    
    275.7
    
    
    
    13.91,288.2
    
    
    
    954.6Deferred liabilities (Note 16)
    
    
    767.8
    
    
    
    702.8Long-term debt (Note 14)
    
    
    3,075.3
    
    
    
    3,348.9Future income taxes (Note 7)
    
    
    1,386.1
    
    
    
    1,295.8Shareholders equity (Note 19)Share capital
    
    
    1,120.6
    
    
    
    1,118.1Contributed surplus
    
    
    300.4
    
    
    
    294.6Foreign currency translation adjustments
    
    
    77.0
    
    
    
    88.0Retained income
    
    
    2,484.4
    
    
    
    2,153.93,982.4
    
    
    
    3,654.6Total liabilities and shareholders equity
    
    $
    10,499.8
    
    
    $
    9,956.7
 
  -s- J.E. Newall
    
    -s- R. PhillipsApproved on behalf of the Board:
    
    J.E. Newall, Director
    
    R. Phillips, Director
  2004 Annual Report
    
    
    45




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##### Table of Contents



statement of consolidated cash flows 2004
    
    
    2003
    
    
    2002(Restated 
    
    
    (Restated Year ended December 31 (in millions)
    
    
    
    
    
    see Note 2)
    
    
    see Note 2)Operating activitiesNet income
    
    $
    413.0
    
    
    $
    401.3
    
    
    $
    487.5Add (deduct) items not affecting cashDepreciation and amortization
    
    
    407.1
    
    
    
    372.3
    
    
    
    340.2Future income taxes (Note 7)
    
    
    131.5
    
    
    
    31.8
    
    
    
    95.0Environmental remediation charge (Note 3)
    
    
    90.9
    
    
    
    
    
    
    
    Restructuring and impairment charge (Note 4)
    
    
    (19.0
    )
    
    
    215.1
    
    
    
    Foreign exchange gain on long-term debt
    
    
    (94.4
    )
    
    
    (209.5
    )
    
    
    (13.4
    )Amortization of deferred charges
    
    
    24.7
    
    
    
    20.3
    
    
    
    19.3Other
    
    
    
    
    
    
    
    
    
    
    (0.8
    )Restructuring payments
    
    
    (88.8
    )
    
    
    (107.0
    )
    
    
    (119.3
    )Other operating activities, net (Note 20)
    
    
    (112.2
    )
    
    
    (365.0
    )
    
    
    (45.0
    )Change in non-cash working capital balances related to
operations (Note 10)
    
    
    33.2
    
    
    
    (53.6
    )
    
    
    Cash provided by operating activities
    
    
    786.0
    
    
    
    305.7
    
    
    
    763.5Investing activitiesAdditions to properties (Note 12)
    
    
    (673.8
    )
    
    
    (686.6
    )
    
    
    (558.5
    )Other investments
    
    
    (2.5
    )
    
    
    (21.9
    )
    
    
    4.0Net proceeds from disposal of transportation properties
    
    
    10.2
    
    
    
    8.2
    
    
    
    3.5Cash used in investing activities
    
    
    (666.1
    )
    
    
    (700.3
    )
    
    
    (551.0
    )Financing activitiesDividends paid
    
    
    (81.7
    )
    
    
    (80.8
    )
    
    
    (80.8
    )Issuance of shares
    
    
    2.5
    
    
    
    2.0
    
    
    
    2.0Issuance of long-term debt
    
    
    193.7
    
    
    
    699.8
    
    
    
    Repayment of long-term debt
    
    
    (16.1
    )
    
    
    (376.6
    )
    
    
    (405.7
    )Cash provided by (used in) financing activities
    
    
    98.4
    
    
    
    244.4
    
    
    
    (484.5
    )Cash positionIncrease (decrease) in net cash
    
    
    218.3
    
    
    
    (150.2
    )
    
    
    (272.0
    )Net cash at beginning of year
    
    
    134.7
    
    
    
    284.9
    
    
    
    556.9Net cash at end of year
    
    $
    353.0
    
    
    $
    134.7
    
    
    $
    284.9Net cash is defined as:Cash and short-term investments
    
    $
    353.0
    
    
    $
    134.7
    
    
    $
    284.9
 
  46
    
    
    2004 Annual Report




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statement of consolidated retained income Year ended December 31 (in millions)
    
    2004
    
    
    2003
    
    
    2002Balance, January 1, as previously reported
    
    $
    2,174.8
    
    
    $
    1,856.9
    
    
    $
    1,441.7Adjustment for change in accounting policy (Note 2)
    
    
    (20.9
    )
    
    
    (23.5
    )
    
    
    (15.0
    )Balance, January 1, as restated
    
    $
    2,153.9
    
    
    $
    1,833.4
    
    
    $
    1,426.7Net income for the year
    
    
    413.0
    
    
    
    401.3
    
    
    
    487.5Dividends
    
    
    (82.5
    )
    
    
    (80.8
    )
    
    
    (80.8
    )Balance, December 31
    
    $
    2,484.4
    
    
    $
    2,153.9
    
    
    $
    1,833.4
 
  2004 Annual Report
    
    
    47




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##### Table of Contents



notes to consolidated
financial
statementsDecember 31, 2004 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESPrinciples of Consolidation   These consolidated financial statements are expressed in Canadian dollars, except where otherwise
indicated. The preparation of these financial statements in conformity with Canadian GAAP requires
management to make estimates and assumptions that affect the reported amounts of revenues and
expenses during the period, the reported amounts of assets and liabilities, and the disclosure of
contingent assets and liabilities at the date of the financial statements. On an ongoing basis,
management reviews its estimates, including those related to environmental liabilities, pensions
and other benefits, depreciable lives of properties, future income tax assets and liabilities as
well as legal and personal injury liabilities based upon currently available information. Actual
results could differ from these estimates. The Company
consolidates variable interest entities (VIE) when it is the primary beneficiary, as
described in the Canadian Institute of Chartered Accountants (CICA) Accounting Guideline 15 Consolidation of
Variable Interest Entities (AcG 15). At December 31, 2004, CPR was the primary beneficiary of
one VIE, which holds rail cars and meets the criteria for consolidation (see Note 2). Principal Subsidiaries   Percentage of voting securitiesPrincipal subsidiary
    
    Incorporated under the laws of
    
    held directly or indirectly by the CompanyCanadian Pacific Railway Company
    
    Canada
    
    
    100%Soo Line Railroad Company (Soo Line)
    
    Minnesota
    
    
    100%Delaware and Hudson Railway Company, Inc. (D&H)
    
    Delaware
    
    
    100%
 Revenue Recognition   Cash and Short-term Investments   Foreign Currency Translation    48
    
    
    2004 Annual Report




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##### Table of Contents



The accounts of the Companys foreign subsidiaries are translated into Canadian dollars using the
year-end exchange rate for assets and liabilities and the average exchange rates in effect for the
year for revenues and expenses. Exchange gains and losses arising from translation of foreign
subsidiaries accounts are included in Shareholders Equity as foreign currency translation
adjustments (see Note 19). A portion of the U.S. dollar-denominated long-term debt has been
designated as a hedge of the net investment in self-sustaining foreign subsidiaries. Unrealized
foreign exchange gains and losses on a portion of the U.S. dollar-denominated long-term debt are
offset against foreign exchange gains and losses arising from translation of self-sustaining
foreign subsidiaries accounts. Pensions and Other Benefits   Benefits other than pensions, including health care, workers compensation in Canada and life
insurance, are actuarially determined and accrued on a basis similar to pension costs. Materials and Supplies   Properties   Depreciation is calculated on the straight-line basis at rates based on the estimated service life,
taking into consideration the projected annual usage of depreciable property, except for rail and
other track material in the U.S., which is based directly on usage. Usage is based on volumes of
traffic.  2004 Annual Report
    
    
    49




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##### Table of Contents



Assets to be disposed of would be presented separately on the Consolidated Balance Sheet. They
would be reported at the lower of the carrying amount or fair value, less costs to sell, and would
no longer be depreciated. At December 31, 2004, there were no material items to be disposed of. Equipment under capital lease is included in properties and depreciated over the period of expected
use. Estimated service life used for principal categories of properties is as follows: Assets
    
    YearsDiesel locomotives
    
    28 to 32Freight cars
    
    23 to 47Ties
    
    35 to 45Rails  in first position
    
    21 to 30 in other than first position
    
    
    54Computer system development costs
    
    5 to 15
 Derivative Financial and Commodity Instruments   The Company from time to time enters into forward exchange contracts to hedge anticipated sales in
U.S. dollars, the related accounts receivable as well as future capital acquisitions. Foreign
exchange translation gains and losses on foreign currency-denominated derivative financial
instruments used to hedge anticipated U.S. dollar-denominated sales are recognized as an adjustment
of the revenues when the sale is recorded. Those used to hedge future capital acquisitions are
recognized as an adjustment of the property amount when the acquisition is recorded. The Company from time to time enters into forward exchange contracts as part of its short-term cash
management strategy. These contracts are not designated as hedges due to their short-term nature
and are carried on the Consolidated Balance Sheet at fair value. Changes in fair value are
recognized in income in the period in which the change occurs. The Company enters into interest rate swaps to manage the risk related to interest rate
fluctuations. These swap agreements require the periodic exchange of payments without the exchange
of the principal amount on which the payments are based. Interest expense on the debt is adjusted
to include the payments owing or receivable under the interest rate swaps. The Company has a fuel-hedging program under which CPR acquires future crude oil contracts for a
percentage of its diesel fuel purchases to reduce the risk of price volatility affecting future
cash flows. In addition, forward foreign exchange contracts are used as part of the fuel-hedging
program to manage the foreign exchange variability component of CPRs fuel price risk. The gains or
losses on the hedge contracts are applied against the corresponding fuel purchases in the period
during which the hedging contracts mature.  50
    
    
    2004 Annual Report




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Restructuring Accrual and Environmental Remediation   Income Taxes   Earnings Per Share   Stock-based Compensation   Any consideration paid by employees on exercise of stock options is credited to share capital when
the option is exercised and the fair value of the option is removed from contributed surplus and
credited to share capital. Compensation expense is also recognized for stock appreciation rights
(SAR), deferred share units (DSU) and employee share purchase plans by amortizing the cost over
the vesting period, with the liability for SARs and DSUs marked-to-market until exercised. 2.  NEW ACCOUNTING POLICIESHedging Transactions   In connection with the implementation of AcG 13, the Company considered its hedging relationships
at January 1, 2004, and determined that its cross-currency interest rate swap agreements, with a
notional amount of CDN$105 million at December 31, 2003, no longer qualified for hedge accounting
for GAAP purposes. At January 1, 2004, an unrealized gain of $2.2 million was recorded in Deferred
Liabilities on the Consolidated Balance Sheet and is being recognized in income currently and in
the future over the term of the originally designated hedged item.  2004 Annual Report
    
    
    51




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##### Table of Contents



Beginning January 1, 2004, derivative instruments that do not qualify as hedges and those not
designated as hedges are being carried on the Consolidated Balance Sheet at fair value and will
result in gains and losses being recorded on the Statement of Consolidated Income. The earnings
impact of these non-hedging derivative instruments was a $1.5-million pre-tax gain, which was
reported as Gain on non-hedging derivative instruments in Other Charges (see Note 5). Asset Retirement Obligations   The result of this restatement was to reduce retained earnings on January 1, 2002, by $15.0 million
and future income tax liabilities by $3.9 million, and increase properties by $14.4 million,
deferred liabilities by $27.9 million and foreign currency translation adjustments by $5.4 million.
The restatement decreased net income by $8.5 million for the year ended December 31, 2002, and
increased net income by $2.6 million for the year ended December 31, 2003. The restatement reduced
basic and fully diluted earnings per share by $0.05 for the year ended December 31, 2002, and
increased basic earnings per share by $0.02 and fully diluted earnings per share by $0.01 for the
year ended December 31, 2003. Variable Interest Entities   Stock-based Compensation   Guarantees    52
    
    
    2004 Annual Report




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Impairment of Long-lived Assets   Severance and Termination Benefits   3.  SPECIAL CHARGE FOR ENVIRONMENTAL REMEDIATION   4.  SPECIAL CHARGE FOR LABOUR RESTRUCTURING AND ASSET IMPAIRMENT   In the fourth quarter of 2004, CPR recorded a reversal of a special charge of $19.0 million
(US$16.0 million) related to the $21.8-million accrual for the labour restructuring on the D&H
taken in 2003, as noted above. A successful new arrangement with another rail carrier received
partial regulatory approval during the fourth quarter 2004. As a result, the labour liability
accrued in 2003 was reversed.  2004 Annual Report
    
    
    53




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##### Table of Contents



5.  OTHER CHARGES  (in millions)
    
    2004
    
    
    2003
    
    
    2002Amortization of discount on accruals recorded at present value
    
    $
    19.1
    
    
    $
    20.3
    
    
    $
    19.3Other exchange losses (gains)
    
    
    11.7
    
    
    
    0.4
    
    
    
    (1.6
    )Loss on sale of accounts receivable (Note 9)
    
    
    2.9
    
    
    
    4.1
    
    
    
    3.5Gain on non-hedging derivative instruments
    
    
    (1.5
    )
    
    
    
    
    
    
    Other
    
    
    3.9
    
    
    
    8.7
    
    
    
    0.6Total other charges
    
    $
    36.1
    
    
    $
    33.5
    
    
    $
    21.8
 Included in Other above in 2002 are charges related to the early redemption of CPRs 8.85%
Debentures  specifically, a call premium of $17.5 million and accelerated amortization of deferred
financing charges of $2.5 million, which are offset by $27.0 million of interest income on an
income tax settlement related to prior years (see Note 7). 6.  INTEREST EXPENSE  (in millions)
    
    2004
    
    
    2003
    
    
    2002Interest expense
    
    $
    223.9
    
    
    $
    226.4
    
    
    $
    254.2Interest income
    
    
    (5.3
    )
    
    
    (7.7
    )
    
    
    (12.0
    )Total interest expense
    
    $
    218.6
    
    
    $
    218.7
    
    
    $
    242.2Gross cash interest payments
    
    $
    219.0
    
    
    $
    228.7
    
    
    $
    245.5
  54
    
    
    2004 Annual Report




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7.  INCOME TAXES   2004
    
    
    2003
    
    
    2002(Restated 
    
    
    (Restated (in millions)
    
    
    
    
    
    see Note 2)
    
    
    see Note 2)Canada (domestic)Current income tax expense
    
    $
    10.6
    
    
    $
    9.2
    
    
    $
    9.9Future income tax expenseOrigination and reversal of temporary differences
    
    
    162.4
    
    
    
    144.4
    
    
    
    144.2Effect of tax rate increases
    
    
    
    
    
    
    51.6
    
    
    
    Recognition of previously unrecorded tax losses
    
    
    (29.1
    )
    
    
    (59.1
    )
    
    
    (8.8
    )Effect of hedge of net investment in self-sustaining foreign subsidiaries
    
    
    (8.7
    )
    
    
    (34.6
    )
    
    
    Other
    
    
    (14.5
    )
    
    
    (58.2
    )
    
    
    (80.8
    )Total future income tax expense
    
    
    110.1
    
    
    
    44.1
    
    
    
    54.6Total income taxes (domestic)
    
    $
    120.7
    
    
    $
    53.3
    
    
    $
    64.5Other (foreign)Current income tax expense
    
    $
    1.2
    
    
    $
    0.6
    
    
    $
    1.0Future income tax expenseOrigination and reversal of temporary differences
    
    
    23.2
    
    
    
    10.4
    
    
    
    55.9Recognition of previously unrecorded tax losses
    
    
    
    
    
    
    (22.7
    )
    
    
    (15.5
    )Other
    
    
    (1.8
    )
    
    
    
    
    
    
    Total future income tax expense
    
    
    21.4
    
    
    
    (12.3
    )
    
    
    40.4Total income taxes (foreign)
    
    $
    22.6
    
    
    $
    (11.7
    )
    
    $
    41.4TotalCurrent income tax expense
    
    $
    11.8
    
    
    $
    9.8
    
    
    $
    10.9Future income tax expense
    
    
    131.5
    
    
    
    31.8
    
    
    
    95.0Total income taxes (domestic and foreign)
    
    $
    143.3
    
    
    $
    41.6
    
    
    $
    105.9
  2004 Annual Report
    
    
    55




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##### Table of Contents



The provision for future income taxes arises from temporary differences in the carrying values of
assets and liabilities for financial statement and income tax purposes. The temporary differences
comprising the future income tax assets and liabilities are as follows: 2004
    
    
    2003(Restated (in millions)
    
    
    
    
    
    see Note 2)Future income tax assetsRestructuring liability
    
    $
    101.2
    
    
    $
    158.2Amount related to tax losses carried forward
    
    
    164.6
    
    
    
    286.2Capital assets tax basis in excess of carrying value
    
    
    
    
    
    
    3.8Liabilities carrying value in excess of tax basis
    
    
    38.0
    
    
    
    67.3Future environmental remediation costs
    
    
    65.0
    
    
    
    14.4Other
    
    
    30.8
    
    
    
    39.6Total future income tax assets
    
    
    399.6
    
    
    
    569.5Future income tax liabilitiesCapital assets carrying value in excess of tax basis
    
    
    1,379.7
    
    
    
    1,465.8Other long-term assets carrying value in excess of tax basis
    
    
    303.7
    
    
    
    255.4Other
    
    
    32.1
    
    
    
    56.7Total future income tax liabilities
    
    
    1,715.5
    
    
    
    1,777.9Net future income tax liabilities
    
    
    1,315.9
    
    
    
    1,208.4Net current future income tax assets
    
    
    70.2
    
    
    
    87.4Net long-term future income tax liabilities
    
    $
    1,386.1
    
    
    $
    1,295.8
 The Companys consolidated effective income tax rate differs from the expected statutory tax rates.
Expected income tax expense at statutory rates is reconciled to income tax expense as follows: 2004
    
    
    2003
    
    
    2002(Restated 
    
    
    (Restated (in millions)
    
    
    
    
    
    see Note 2)
    
    
    see Note 2)Expected income tax expense at Canadian statutory tax rates
    
    $
    202.4
    
    
    $
    168.0
    
    
    $
    222.7Increase (decrease) in taxes resulting from:Large corporations tax
    
    
    5.9
    
    
    
    11.1
    
    
    
    10.0Gains not subject to tax
    
    
    (31.8
    )
    
    
    (50.5
    )
    
    
    (19.4
    )Foreign tax rate differentials
    
    
    6.8
    
    
    
    19.2
    
    
    
    1.8Effect of tax rate increases
    
    
    
    
    
    
    51.6
    
    
    
    Recognition of previously unrecorded tax losses
    
    
    (29.1
    )
    
    
    (81.8
    )
    
    
    (24.3
    )Other
    
    
    (10.9
    )
    
    
    (76.0
    )
    
    
    (84.9
    )Income tax expense
    
    $
    143.3
    
    
    $
    41.6
    
    
    $
    105.9
  56
    
    
    2004 Annual Report




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The Company has $333.7 million of capital losses (2003  $488.0 million) available indefinitely for
Canadian tax purposes for which no future income tax asset has been recognized. In determining its future income taxes, the Company makes estimates and assumptions regarding
future tax matters. During 2003, the Company revalued various components of its future income tax
liability and reduced the estimate of its future income tax liability by $59.3 million. The Company
believes that its future income tax provision is adequate. During 2002, as a result of a favourable decision by the Federal Court of Appeal (the Queen v.
Canadian Pacific Limited(legally renamed Canadian Pacific Railway Company in 1996)), the Company
reported a recovery of income taxes of approximately $72.0 million. 8.  EARNINGS PER SHARE   Basic earnings per share have been calculated using net income for the year divided by the weighted
average number of CPRL shares outstanding during the year. Diluted earnings per share have been calculated using the Treasury Stock Method, which gives effect
to the dilutive value of outstanding options. After the spin-off of CPR from Canadian Pacific
Limited (CPL) in October 2001, CPL stock options held by CPL employees were exchanged for CPR
replacement options. At December 31, 2004, there were 0.4 million replacement options outstanding
(2003  0.5 million replacement options; 2002  0.7 million replacement options). Since the
spin-off, CPR has issued new stock options to CPR employees. At December 31, 2004, there were 5.6
million new options outstanding (2003  4.5 million; 2002  3.5 million). These new option totals
exclude 1.7 million options at December 31, 2004, (2003  1.2 million; 2002  0.6 million) for
which there are tandem SARs outstanding, as these are not included in the dilution calculation (see
Note 21). The number of shares used in the earnings per share calculations is reconciled as follows: (in millions)
    
    2004
    
    
    2003
    
    
    2002Weighted average shares outstanding
    
    
    158.7
    
    
    
    158.5
    
    
    
    158.5Dilutive effect of stock options
    
    
    0.4
    
    
    
    0.6
    
    
    
    0.8Weighted average diluted shares outstanding
    
    
    159.1
    
    
    
    159.1
    
    
    
    159.3
 2004
    
    
    2003
    
    
    2002(Restated 
    
    
    (Restated (in dollars)
    
    
    
    
    
    see Note 2)
    
    
    see Note 2)Basic earnings per share
    
    $
    2.60
    
    
    $
    2.53
    
    
    $
    3.08Diluted earnings per share
    
    $
    2.60
    
    
    $
    2.52
    
    
    $
    3.06
 In 2004, options exercisable for 634,639 Common Shares (2003  306,426) were excluded from the
computation of diluted earnings per share because their effects were not dilutive.  2004 Annual Report
    
    
    57




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9.  SALE OF ACCOUNTS RECEIVABLE   Receivables funded under the securitization program may not include delinquent, defaulted or
written-off receivables, nor receivables that do not meet certain obligor-specific criteria,
including concentrations in excess of prescribed limits. The Company maintains an adequate
allowance for doubtful accounts based on expected collectibility of accounts receivable. Credit
losses are based on specific identification of uncollectible accounts and the application of
historical percentages by aging category. At December 31, 2004, allowances of $3.6 million (2003 
$5.6 million) were recorded in Accounts Receivable. During 2004, $2.8 million (2003  $1.1
million) of accounts receivable were written off to Freight Revenues. The Company has retained the responsibility for servicing, administering and collecting freight
receivables sold. However, even though the Company acts as collector of all of the securitized
receivables, it has no claim against the trusts co-ownership interest in the securitized
receivables. No servicing asset or liability has been recorded as the benefits CPR receives for
servicing the receivables approximate the related costs. Proceeds from collections reinvested in
the accounts receivable securitization program were $382.4 million in 2004. The securitization program is subject to standard reporting and credit-rating requirements for CPR.
The reporting includes provision of a monthly portfolio report that the pool of eligible
receivables satisfies pre-established criteria that are reviewed and approved by Dominion Bond
Rating Services and are standard for agreements of this nature. Failure to comply with these
provisions would trigger termination of the program.  58
    
    
    2004 Annual Report




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10.  CHANGE IN NON-CASH WORKING CAPITAL BALANCES RELATED TO OPERATIONS  (in millions)
    
    2004
    
    
    2003
    
    
    2002(Use) source of cash:Accounts receivable
    
    $
    (39.0
    )
    
    $
    45.2
    
    
    $
    21.1Materials and supplies
    
    
    (35.5
    )
    
    
    2.5
    
    
    
    (6.6
    )Accounts payable and accrued liabilities
    
    
    112.3
    
    
    
    (76.3
    )
    
    
    (17.4
    )Income and other taxes payable
    
    
    (4.6
    )
    
    
    (25.0
    )
    
    
    2.9Change in non-cash working capital
    
    $
    33.2
    
    
    $
    (53.6
    )
    
    $
    
 11.  INVESTMENTS  (in millions)
    
    2004
    
    
    2003Rail investments accounted for on an equity basis
    
    $
    74.7
    
    
    $
    77.6Other investments accounted for on a cost basis
    
    
    21.3
    
    
    
    28.0Total investments
    
    $
    96.0
    
    
    $
    105.6
 Equity income from CPRs investment in the Detroit River Tunnel Partnership was $6.2 million in
2004 (2003  $14.6 million). The equity loss from the Companys investment in the CNCP
Niagara-Windsor Partnership was $0.9 million in 2004 (2003  $nil). CPRs investment in the Indiana
Harbour Belt Railroad Company generated equity income of $2.5 million in 2004 (2003  $2.4 million).  2004 Annual Report
    
    
    59




---



##### Table of Contents



12.  NET PROPERTIES  Accumulated
    
    
    Net book(in millions)
    
    Cost
    
    
    depreciation
    
    
    value2004Track and roadway
    
    $
    7,667.1
    
    
    $
    2,482.7
    
    
    $
    5,184.4Buildings
    
    
    319.7
    
    
    
    128.4
    
    
    
    191.3Rolling stock
    
    
    3,323.2
    
    
    
    1,319.8
    
    
    
    2,003.4Other
    
    
    1,566.1
    
    
    
    551.7
    
    
    
    1,014.4Total net properties
    
    $
    12,876.1
    
    
    $
    4,482.6
    
    
    $
    8,393.52003 (Restated  see Note 2)Track and roadway
    
    $
    7,325.7
    
    
    $
    2,321.0
    
    
    $
    5,004.7Buildings
    
    
    314.6
    
    
    
    108.1
    
    
    
    206.5Rolling stock
    
    
    3,270.4
    
    
    
    1,277.5
    
    
    
    1,992.9Other
    
    
    1,535.9
    
    
    
    520.4
    
    
    
    1,015.5Total net properties
    
    $
    12,446.6
    
    
    $
    4,227.0
    
    
    $
    8,219.6
 Included in the Other category at December 31, 2004, are software development costs of $596.5
million (2003  $582.9 million) and accumulated depreciation of $202.8 million (2003  $164.7
million). Additions during 2004 were $30.3 million (2003  $31.7 million) and depreciation expense
was $53.6 million (2003  $55.3 million). At December 31, 2004, net properties included $396.9 million (2003  $387.9 million) of assets held
under capital lease at cost and related accumulated depreciation of $83.5 million (2003  $70.1
million). During the year, capital assets were acquired under the Companys capital program at an aggregate
cost of $686.3 million (2003  $699.0 million), none of which were acquired by means of capital
leases (2003  $nil). At April 1, 2003, the Company consolidated $193.5 million in net properties
of a VIE for which it is the primary beneficiary (see Note 2). Cash payments related to capital
purchases were $673.8 million in 2004 (2003  $686.6 million). At December 31, 2004, $0.2 million
(2003  $12.4 million) remained in accounts payable related to the above purchases. Included in the special charge recorded in the second quarter of 2003 was a $102.7-million
write-down to fair market value of the assets of the D&H, including a $21.8-million (US$16.0
million) accrual for the impact of labour restructuring (see Note 4). In the fourth quarter of 2003, CPR and IBM Canada Ltd. (IBM) entered into a seven-year agreement
for IBM to operate and enhance the Companys computing infrastructure. CPR incurred a loss of $28.9
million on the transfer of computer assets to IBM at the start of the arrangement. 13.  OTHER ASSETS AND DEFERRED CHARGES  (in millions)
    
    2004
    
    
    2003Prepaid pension costs
    
    $
    838.3
    
    
    $
    693.9Other
    
    
    180.0
    
    
    
    213.4Total other assets and deferred charges
    
    $
    1,018.3
    
    
    $
    907.3
  60
    
    
    2004 Annual Report




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##### Table of Contents



14.  LONG-TERM DEBT  (in millions)
    
    Currency in which payable
    
    
    2004
    
    
    20036.250 % Notes due 2011
    
    US$
    
    $
    480.8
    
    
    $
    518.67.125 % Debentures due 2031
    
    US$
    
    
    420.7
    
    
    
    453.89.450 % Debentures due 2021
    
    US$
    
    
    300.5
    
    
    
    324.15.750 % Debentures due 2033
    
    US$
    
    
    300.5
    
    
    
    324.17.20 % Medium Term Notes due 2005
    
    CDN$
    
    
    250.0
    
    
    
    250.04.90 % Medium Term Notes due 2010
    
    CDN$
    
    
    350.0
    
    
    
    350.05.41 % Senior Secured Notes due 2024
    
    US$
    
    
    172.6
    
    
    
    6.91 % Secured Equipment Notes due 2005  2024
    
    CDN$
    
    
    235.0
    
    
    
    235.07.49 % Equipment Trust Certificates due 2005  2021
    
    US$
    
    
    144.2
    
    
    
    155.6Secured Equipment Loan due 2005  2007
    
    US$
    
    
    153.4
    
    
    
    168.6Secured
Equipment Loan due 2005  2015
    
    CDN$
    
    
    156.2
    
    
    
    158.4Obligations under capital leases due 2005  2022 (6.85%  7.65 % )
    
    US$
    
    
    335.3
    
    
    
    365.6Obligations under capital leases due 2006 (7.88%  10.93 % )
    
    CDN$
    
    
    0.9
    
    
    
    1.4Bank loan payable on demand due 2010 (5.883 %)
    
    CDN$
    
    
    4.3
    
    
    
    4.0Other
    
    US$
    
    
    0.4
    
    
    
    0.63,304.8
    
    
    
    3,309.8Perpetual 4 % Consolidated Debenture Stock
    
    US$
    
    
    36.8
    
    
    
    40.2Perpetual 4 % Consolidated Debenture Stock
    
    GBP£
    
    
    9.4
    
    
    
    12.83,351.0
    
    
    
    3,362.8Less: Long-term debt maturing within one year
    
    
    
    
    
    
    275.7
    
    
    
    13.9$
    3,075.3
    
    
    $
    3,348.9
 At December 31, 2004, long-term debt denominated in U.S. dollars was CDN$2,345.2 million (2003  CDN$2,351.2 million). Interest on each of the following instruments is paid semi-annually: 6.250 % Notes and 7.125 %
Debentures on April 15 and October 15; 9.450 % Debentures on February 1 and August 1; and 5.750 %
Debentures on March 15 and September 15 of each year. All of these Notes and Debentures are
unsecured but carry a negative pledge. The 5.41 % Senior Secured Notes due 2024 are secured by specific locomotive units with a carrying
value at December 31, 2004, of $204.9 million. Equal blended semi-annual payments of principal and
interest are made on March 3 and September 3 of each year, up to and including September 3, 2023.
Final payment of the remaining interest and principal will be made on March 3, 2024. The 7.20 % Medium Term Notes due 2005 are unsecured but carry a negative pledge. Interest is paid
semi-annually in arrears on June 28 and December 28 of each year. The 4.90 % Medium Term Notes due 2010 are unsecured but carry a negative pledge. Interest is paid
semi-annually in arrears on June 15 and December 15 of each year.  2004 Annual Report
    
    
    61




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##### Table of Contents



The 6.91 % Secured Equipment Notes are full recourse obligations of the Company secured by a first
charge on specific locomotive units with a carrying value at December 31, 2004, of $212.3 million.
The Company made semi-annual payments of interest in the amount of $8.1 million on April 1 and
October 1 of each year, up to and including October 1, 2004. Thereafter, the Company will pay on
April 1 and October 1 of each year, commencing April 1, 2005, up to and including October 1, 2024,
equal blended semi-annual payments of principal and interest of $10.9 million. The 7.49 % Equipment Trust Certificates are secured by specific locomotive units with a carrying
value at December 31, 2004, of $160.8 million. Semi-annual interest payments of US$4.5 million are
made on January 15 and July 15 of each year, up to and including January 15, 2005. Thereafter,
semi-annual payments will vary in amount and will be interest-only payments or blended principal
and interest payments. Final payment of principal is due January 15, 2021. The Secured Equipment Loan due 2005-2007 is secured by specific units of rolling stock with a
carrying value at December 31, 2004, of $195.5 million. The interest rate is floating and is
calculated based on a blend of one-month and three-month average LIBOR plus a spread (2004  1.99
%; 2003  1.95 %). The Company makes blended payments of principal and interest quarterly on
February 20, May 20, August 20 and November 20 of each year. The Secured Equipment Loan due 2005-2015 is secured by specific locomotive units with a carrying
value at December 31, 2004, of $173.9 million. The interest rate is floating and is calculated
based on a six-month average CDOR (calculated based on an average of Bankers Acceptance rates)
plus 53 basis points (2004  3.22 %; 2003  3.56 %). The Company makes blended payments of
principal and interest semi-annually on February 1 and August 1 of each year. The bank loan payable on demand matures in 2010 and carries an interest rate of 5.883 %. The amount
of the loan at December 31, 2004, was $163.8 million (2003  $154.5 million). The Company has
offset against this loan a financial asset of $159.6 million (2003  $150.5 million) with the same
financial institution. The Consolidated Debenture Stock, created by an Act of Parliament of 1889, constitutes a first
charge upon and over the whole of the undertaking, railways, works, rolling stock, plant, property
and effects of the Company, with certain exceptions. Annual maturities and sinking fund requirements, excluding those pertaining to capital leases, for
each of the five years following 2004 are (in millions): 2005  $271.0; 2006  $19.4; 2007  $166.4; 2008  $19.0; 2009  $20.0.  62
    
    
    2004 Annual Report




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##### Table of Contents



At December 31, 2004, capital lease obligations included in long-term debt were as follows: (in millions)
    
    Year
    
    
    Capital leasesMinimum lease payments in:
    
    
    2005
    
    
    $
    28.52006
    
    
    
    29.72007
    
    
    
    30.92008
    
    
    
    30.92009
    
    
    
    32.3Thereafter
    
    
    445.4Total minimum lease payments
    
    
    
    
    
    
    597.7Less: Imputed interest
    
    
    
    
    
    
    261.5Present value of minimum lease payments
    
    
    
    
    
    
    336.2Less: Current portion
    
    
    
    
    
    
    4.7Long-term portion of capital lease obligations
    
    
    
    
    
    $
    331.5
 The carrying value of the assets securing the capital lease obligations was $313.4 million at
December 31, 2004. 15.  FINANCIAL INSTRUMENTSForeign Exchange Forward Contracts   In 2004, CPR designated US$70.0 million of short-term investments as a hedge of the Companys firm
commitment to purchase 41 locomotives in January 2005, which is accounted for as a fair value
hedge. At December 31, 2004, the unrealized loss on this hedge was CDN$1.1 million. Commodity Contracts    2004 Annual Report
    
    
    63




---



##### Table of Contents



Interest Rate Contracts   At December 31, 2004, the Company had outstanding interest rate swap agreements, accounted for as a
fair value hedge, for a nominal amount of US$200.0 million (2003  US$150.0 million). The swap
agreements converted a portion of the Companys fixed-interest-rate liability into a variable-rate
liability for the 6.250 % Notes. At December 31, 2004, the unrealized gain on these interest rate
swap agreements was CDN$8.8 million (2003  CDN$8.4 million). The following table discloses the terms of the swap agreements at December 31, 2004: Expiration
    
    October 15, 2011Notional amount of principal (in CDN$ millions)
    
    $
    240.4Fixed receiving rate
    
    
    6.250
    %Variable paying rate (1)
    
    
    3.2
    %
 (1)
 In 2004, the Company entered into agreements that have established the borrowing rate on
US$200.0 million of long-term debt, expected to be issued in the first half of 2005. Unrealized
gains on this arrangement, which is accounted for as a cash flow hedge, were CDN$1.8 million at
December 31, 2004. The unrealized gains are expected to be amortized over the life of related debt
issuance. During 2004, the Company recorded losses of CDN$2.0 million on six treasury rate locks totalling
US$124.0 million to fix the benchmark rate on the 5.41 % US$145.0-million Senior Secured Notes
offering issued in March 2004. These losses are amortized over the 20-year life of the existing
financing. During 2003, the Company recorded a $23.3-million loss paid to settle interest rate locks on
CDN$200.0 million of long-term debt. The interest rate locks were accounted for as a cash flow
hedge and are being amortized over the seven-year life of the 4.90 % Medium Term Notes. In
addition, the Company recorded a $9.4-million gain on settlement of interest rate locks on US$214.0
million of long-term debt. These interest rate locks were accounted for as a cash flow hedge and
are being amortized over the 30-year life of the 5.750 % Debentures. Credit Risk Management    64
    
    
    2004 Annual Report




---



##### Table of Contents



Interest Rate Exposure and Fair Values   2004
    
    
    
    
    
    Fixed interest rate maturing inAt floating
    
    
    
    
    
    
    2006
    
    
    2010
    
    
    Total carrying(in millions)
    
    interest rates
    
    
    2005
    
    
    to 2009
    
    
    and after
    
    
    value
    
    
    Fair valueFinancial assetsCash and short-term investments
    
    $
    353.0
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    353.0
    
    
    $
    353.0Financial liabilities6.250 % Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    480.8
    
    
    
    480.8
    
    
    
    530.07.125 % Debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    420.7
    
    
    
    420.7
    
    
    
    501.79.450 % Debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300.5
    
    
    
    300.5
    
    
    
    419.95.750 % Debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300.5
    
    
    
    300.5
    
    
    
    306.57.20 % Medium Term Notes due 2005
    
    
    
    
    
    
    250.0
    
    
    
    
    
    
    
    
    
    
    
    250.0
    
    
    
    255.34.90 % Medium Term Notes due 2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    350.0
    
    
    
    350.0
    
    
    
    359.65.41 % Senior Secured Notes due 2024
    
    
    
    
    
    
    3.5
    
    
    
    16.1
    
    
    
    153.0
    
    
    
    172.6
    
    
    
    180.56.91 % Secured Equipment Notes
    
    
    
    
    
    
    5.7
    
    
    
    27.1
    
    
    
    202.2
    
    
    
    235.0
    
    
    
    270.47.49 % Equipment Trust Certificates
    
    
    
    
    
    
    2.1
    
    
    
    13.3
    
    
    
    128.8
    
    
    
    144.2
    
    
    
    177.2Secured Equipment Loan due 2007
    
    
    153.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    153.4
    
    
    
    153.4Secured Equipment Loan due 2015
    
    
    156.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156.2
    
    
    
    156.24 % Consolidated Debenture Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46.2
    
    
    
    46.2
    
    
    
    38.3Obligations under capital leases
    
    
    
    
    
    
    4.7
    
    
    
    31.7
    
    
    
    299.8
    
    
    
    336.2
    
    
    
    396.9Bank loan payable on demand
    
    
    
    
    
    
    4.3
    
    
    
    
    
    
    
    
    
    
    
    4.3
    
    
    
    4.3Other
    
    
    
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    
    
    
    
    0.4
    
    
    
    0.4Foreign exchange forward contracts
on future revenue streams
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Crude oil futures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32.0Foreign exchange forward contracts on
fuel
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8.8
    )Interest rate swaps
    
    
    240.4
    
    
    
    
    
    
    
    
    
    
    
    (240.4
    )
    
    
    
    
    
    
    8.8Interest rate locks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.8Total financial liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,351.0
    
    
    $
    3,784.2
  2004 Annual Report
    
    
    65




---



##### Table of Contents



2003
    
    
    
    
    
    Fixed interest rate maturing inAt floating
    
    
    
    
    
    
    2005
    
    
    2009
    
    
    Total carrying(in millions)
    
    interest rates
    
    
    2004
    
    
    to 2008
    
    
    and after
    
    
    value
    
    
    Fair valueFinancial assetsCash and short-term investments
    
    $
    134.7
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    134.7
    
    
    $
    134.7Financial liabilities6.250 % Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    518.6
    
    
    
    518.6
    
    
    
    557.97.125 % Debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    453.8
    
    
    
    453.8
    
    
    
    540.39.450 % Debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    324.1
    
    
    
    324.1
    
    
    
    442.35.750 % Debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    324.1
    
    
    
    324.1
    
    
    
    303.17.20 % Medium Term Notes due
2005
    
    
    
    
    
    
    
    
    
    
    250.0
    
    
    
    
    
    
    
    250.0
    
    
    
    264.84.90 % Medium Term Notes due
2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    350.0
    
    
    
    350.0
    
    
    
    349.36.91 % Secured Equipment Notes
    
    
    
    
    
    
    
    
    
    
    25.3
    
    
    
    209.7
    
    
    
    235.0
    
    
    
    264.77.49 % Equipment Trust
Certificates
    
    
    
    
    
    
    
    
    
    
    12.5
    
    
    
    143.1
    
    
    
    155.6
    
    
    
    215.5Secured Equipment Loan due 2007
    
    
    168.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    168.6
    
    
    
    168.6Secured Equipment Loan due 2015
    
    
    158.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    158.4
    
    
    
    158.44 % Consolidated Debenture Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53.0
    
    
    
    53.0
    
    
    
    42.6Obligations under capital leases
    
    
    
    
    
    
    4.4
    
    
    
    29.8
    
    
    
    332.8
    
    
    
    367.0
    
    
    
    452.8Bank loan payable on demand
    
    
    
    
    
    
    4.0
    
    
    
    
    
    
    
    
    
    
    
    4.0
    
    
    
    4.0Other
    
    
    
    
    
    
    0.2
    
    
    
    0.4
    
    
    
    
    
    
    
    0.6
    
    
    
    0.6Crude oil futures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26.8Interest rate swaps
    
    
    299.5
    
    
    
    
    
    
    
    
    
    
    
    (299.5
    )
    
    
    
    
    
    
    10.6Interest rate locks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.4
    )Total financial liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,362.8
    
    
    $
    3,801.9
 The Company has determined the estimated fair values of its financial instruments based on
appropriate valuation methodologies. However, considerable judgment is necessary to develop these
estimates. Accordingly, the estimates presented herein are not necessarily indicative of what the
Company could realize in a current market exchange. The use of different assumptions or
methodologies may have a material effect on the estimated fair value amounts. The following methods and assumptions were used to estimate the fair value of each class of
financial instrument:  
    Short-term financial assets and liabilities are valued at their carrying amounts as
presented on the Consolidated Balance Sheet, which are reasonable estimates of fair value
due to the relatively short period to maturity of these instruments.
    The fair value of publicly traded long-term debt is determined based on market prices at
December 31, 2004 and 2003. The fair value of other long-term debt is estimated based on
rates currently available to the Company for long-term borrowings, with terms and conditions
similar to those borrowings in place at the applicable Consolidated Balance Sheet date.
    The fair value of derivative instruments is estimated as the unrealized gain or loss
calculated based on market prices or rates at December 31, 2004 and 2003, which generally
reflects the estimated amounts the Company would receive or pay to terminate the contracts
at the applicable Consolidated Balance Sheet date.  66
    
    
    2004 Annual Report




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##### Table of Contents



16.  DEFERRED LIABILITIES  2004
    
    
    2003(Restated (in millions)
    
    
    
    
    see Note 2)Provision for restructuring and environmental remediation (Note 18)
    
    $
    448.7
    
    
    $
    462.2Deferred workers compensation
    
    
    177.1
    
    
    
    181.3Accrued employee benefits
    
    
    151.0
    
    
    
    127.6Asset retirement obligations (Note 17)
    
    
    32.4
    
    
    
    31.6Fibre optics rights-of-way deferred revenue
    
    
    48.8
    
    
    
    54.7Other
    
    
    78.0
    
    
    
    48.2936.0
    
    
    
    905.6Less: Amount payable/realizable within one year
    
    
    168.2
    
    
    
    202.8Total deferred liabilities
    
    $
    767.8
    
    
    $
    702.8
 Fibre optics rights-of-way deferred revenue is being amortized to income on a straight-line basis
over the related lease terms. 17.  ASSET RETIREMENT OBLIGATIONS   The accretion expense related to these AROs in 2004 was $2.0 million (2003  $1.9 million), offset
by payments made of $1.2 million (2003  $nil), thereby increasing the ARO liability to $32.4
million at December 31, 2004 (2003  $31.6 million). Accretion expense is included in Depreciation
and Amortization on the Statement of Consolidated Income. Upon the ultimate retirement of grain-dependent branch lines, the Company has to pay a fee, levied
under the Canada Transportation Act, of $30,000 per mile of abandoned track. The undiscounted
amount of the liability was $59.4 million at December 31, 2004 (2003  $60.7 million), which, when
present valued, was $31.4 million at December 31, 2004 (2003  $30.7 million). The payments are
expected to be made in the 2005-2054 period. The Company also has a liability on a joint facility that will have to be settled based on a
proportion of use during the life of the asset. The estimate of the obligation at December 31,
2004, was $13.9 million (2003  $13.2 million), which, when present valued, was $1.0 million at
December 31, 2004 (2003  $0.9 million). For purposes of estimating this liability, the payment
related to the retirement of the joint facility is estimated to be in 40 years.  2004 Annual Report
    
    
    67




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18.  RESTRUCTURING ACCRUAL AND ENVIRONMENTAL REMEDIATION   Set out below is a reconciliation of CPRs liabilities associated with its restructuring and
environmental remediation programs: Foreign
    
    
    ClosingOpening balance
    
    
    
    
    
    
    
    
    
    
    Amortization
    
    
    exchange
    
    
    balance(in millions)
    
    Jan. 1, 2004
    
    
    Accrued (1)
    
    
    Payments
    
    
    of discount (2)
    
    
    impact
    
    
    Dec. 31, 2004Labour liability for terminations
and severances
    
    $
    358.2
    
    
    
    (36.4
    )
    
    
    (62.2
    )
    
    
    16.2
    
    
    
    (6.1
    )
    
    $
    269.7Other non-labour liabilities for
exit plans
    
    
    9.2
    
    
    
    0.9
    
    
    
    (3.3
    )
    
    
    0.4
    
    
    
    (1.1
    )
    
    
    6.1Total restructuring liability
    
    
    367.4
    
    
    
    (35.5
    )
    
    
    (65.5
    )
    
    
    16.6
    
    
    
    (7.2
    )
    
    
    275.8Environmental remediation program
    
    
    94.8
    
    
    
    101.0
    
    
    
    (23.3
    )
    
    
    
    
    
    
    0.4
    
    
    
    172.9Total restructuring and environmental
remediation liability
    
    $
    462.2
    
    
    
    65.5
    
    
    
    (88.8
    )
    
    
    16.6
    
    
    
    (6.8
    )
    
    $
    448.7
 (1)
 (2)
 Foreign
    
    
    ClosingOpening balance
    
    
    
    
    
    
    
    
    
    
    Amortization
    
    
    exchange
    
    
    balance(in millions)
    
    Jan. 1, 2003
    
    
    Accrued (1)
    
    
    Payments
    
    
    of discount (2)
    
    
    impact
    
    
    Dec. 31, 2003Labour liability for terminations
and severances
    
    $
    313.0
    
    
    
    126.5
    
    
    
    (78.4
    )
    
    
    12.5
    
    
    
    (15.4
    )
    
    $
    358.2Other non-labour liabilities for
exit plans
    
    
    13.3
    
    
    
    1.9
    
    
    
    (8.4
    )
    
    
    0.5
    
    
    
    1.9
    
    
    
    9.2Total restructuring liability
    
    
    326.3
    
    
    
    128.4
    
    
    
    (86.8
    )
    
    
    13.0
    
    
    
    (13.5
    )
    
    
    367.4Environmental remediation program
    
    
    115.5
    
    
    
    5.5
    
    
    
    (20.2
    )
    
    
    
    
    
    
    (6.0
    )
    
    
    94.8Total restructuring and environmental
remediation liability
    
    $
    441.8
    
    
    
    133.9
    
    
    
    (107.0
    )
    
    
    13.0
    
    
    
    (19.5
    )
    
    $
    462.2
 (1)
 (2)
  68
    
    
    2004 Annual Report




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19.  SHAREHOLDERS EQUITYAuthorized and Issued Share Capital   An analysis of Common Share balances is as follows: 2004
    
    
    
    
    
    
    2003(in millions)
    
    Number
    
    
    Amount
    
    
    
    
    
    
    Number
    
    
    AmountBalance, January 1
    
    
    158.7
    
    
    $
    1,118.1
    
    
    
    
    
    
    
    158.5
    
    
    $
    1,116.1Common Shares issued under stock option plans
    
    
    0.1
    
    
    
    2.5
    
    
    
    
    
    
    
    0.2
    
    
    
    2.0Balance, December 31
    
    
    158.8
    
    
    $
    1,120.6
    
    
    
    
    
    
    
    158.7
    
    
    $
    1,118.1
 Contributed Surplus   Foreign Currency Translation Adjustments   2004
    
    
    2003(Restated (in millions)
    
    
    
    
    see Note 2)Balance, January 1
    
    $
    88.0
    
    
    $
    127.7Change in foreign currency translation rates on foreign subsidiaries
    
    
    (50.6
    )
    
    
    (194.0
    )Balance, December 31, before designated hedge
    
    
    37.4
    
    
    
    (66.3
    )Designated hedge, net of tax
    
    
    39.6
    
    
    
    154.3Balance, December 31, including designated hedge
    
    $
    77.0
    
    
    $
    88.0
 For the year ended December 31, 2004, the Company recorded future income taxes of $8.7 million on
the designated hedge (2003  $34.6 million).  2004 Annual Report
    
    
    69




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##### Table of Contents



20.  PENSIONS AND OTHER BENEFITS   The DB plans provide for pensions based principally on years of service and compensation rates near
retirement. Pensions for Canadian pensioners are partially indexed to inflation. Annual employer
contributions to the DB plans, which are actuarially determined, are made on the basis of not less
than the minimum amounts required by federal pension supervisory authorities. Other benefits include post-retirement health and life insurance for pensioners, and
post-employment workers compensation benefits, which are based on Company-specific claims. At December 31, the elements of defined benefit cost for DB pension plans and other benefits
recognized in the year included the following components: Pensions
    
    
    Other benefits(in millions)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002Current service cost (benefits earned
by employees in the year)
    
    $
    71.7
    
    
    $
    64.4
    
    
    $
    61.7
    
    
    $
    13.0
    
    
    $
    15.3
    
    
    $
    14.6Interest cost on benefit obligation
    
    
    400.0
    
    
    
    395.0
    
    
    
    387.1
    
    
    
    27.5
    
    
    
    26.7
    
    
    
    25.6Actual return on fund assets
    
    
    (610.9
    )
    
    
    (604.7
    )
    
    
    95.6
    
    
    
    (1.1
    )
    
    
    
    
    
    
    Actuarial loss
    
    
    168.1
    
    
    
    403.7
    
    
    
    23.8
    
    
    
    18.8
    
    
    
    19.6
    
    
    
    42.8Plan amendments
    
    
    
    
    
    
    14.2
    
    
    
    (4.5
    )
    
    
    1.6
    
    
    
    (2.6
    )
    
    
    (5.1
    )Elements of employee future
benefit cost before adjustments
to recognize the long-term nature
of employee future benefit costs
    
    
    28.9
    
    
    
    272.6
    
    
    
    563.7
    
    
    
    59.8
    
    
    
    59.0
    
    
    
    77.9Adjustments to recognize the long-term
nature of employee future benefit costs:Amortization of transitional (asset)
obligation
    
    
    (16.2
    )
    
    
    (15.6
    )
    
    
    (15.6
    )
    
    
    12.8
    
    
    
    13.4
    
    
    
    13.4Difference between expected return
and actual return on fund assets
    
    
    129.9
    
    
    
    156.1
    
    
    
    (545.6
    )
    
    
    
    
    
    
    
    
    
    
    Difference between actuarial loss recognized
and actual actuarial loss on benefit
obligation
    
    
    (128.6
    )
    
    
    (399.5
    )
    
    
    (23.5
    )
    
    
    (15.4
    )
    
    
    (21.9
    )
    
    
    (42.0
    )Difference between amortization of prior
service costs and actual plan amendments
    
    
    11.1
    
    
    
    (4.4
    )
    
    
    16.3
    
    
    
    (1.6
    )
    
    
    2.6
    
    
    
    5.1Net benefit cost
    
    $
    25.1
    
    
    $
    9.2
    
    
    $
    (4.7
    )
    
    $
    55.6
    
    
    $
    53.1
    
    
    $
    54.4
  70
    
    
    2004 Annual Report




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##### Table of Contents



Information about the Companys DB pension plans and other benefits, in aggregate, is as follows: Pensions
    
    
    Other benefits(in millions)
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Change in benefit obligation:Benefit obligation at January 1
    $
    
    6,525.3
    
    
    $
    5,993.1
    
    $
    
    450.4
    
    
    $
    423.8Current service cost
    
    
    71.7
    
    
    
    64.4
    
    
    
    13.0
    
    
    
    15.3Interest cost
    
    
    400.0
    
    
    
    395.0
    
    
    
    27.5
    
    
    
    26.7Employee contributions
    
    
    45.7
    
    
    
    47.3
    
    
    
    
    
    
    
    Benefits paid
    
    
    (372.5
    )
    
    
    (361.5
    )
    
    
    (32.2
    )
    
    
    (32.7
    )Foreign currency changes
    
    
    (11.3
    )
    
    
    (30.9
    )
    
    
    (5.4
    )
    
    
    (16.9
    )Plan amendments
    
    
    
    
    
    
    14.2
    
    
    
    1.6
    
    
    
    (2.6
    )Change in provincial Workers Compensation Board
account
    
    
    
    
    
    
    
    
    
    
    (4.3
    )
    
    
    17.2Actuarial loss
    
    
    168.1
    
    
    
    403.7
    
    
    
    18.8
    
    
    
    19.6Benefit obligation at December 31
    $
    
    6,827.0
    
    $
    
    6,525.3
    
    
    $
    469.4
    
    
    $
    450.4Change in fund assets:Fair value of fund assets at January 1
    $
    
    5,771.6
    
    $
    
    5,129.6
    
    
    $
    17.2
    
    
    $
    Actual return on fund assets
    
    
    610.9
    
    
    
    604.7
    
    
    
    1.1
    
    
    
    Employer contributions
    
    
    175.7
    
    
    
    371.8
    
    
    
    30.3
    
    
    
    32.7Employee contributions
    
    
    45.7
    
    
    
    47.3
    
    
    
    
    
    
    
    Benefits paid
    
    
    (372.5
    )
    
    
    (361.5
    )
    
    
    (32.2
    )
    
    
    (32.7
    )Change in provincial Workers Compensation Board
account
    
    
    
    
    
    
    
    
    
    
    (4.3
    )
    
    
    17.2Foreign currency changes
    
    
    (8.7
    )
    
    
    (20.3
    )
    
    
    
    
    
    
    Fair value of fund assets at December 31
    $
    
    6,222.7
    
    $
    
    5,771.6
    
    
    $
    12.1
    
    
    $
    17.2Funded status  plan deficit
    $
    
    (604.3
    )
    $
    
    (753.7
    )
    
    $
    (457.3
    )
    
    $
    (433.2
    )Unamortized prior service cost
    
    
    100.1
    
    
    
    111.2
    
    
    
    1.6
    
    
    
    Unamortized net transitional (asset) obligation
    
    
    (128.9
    )
    
    
    (145.1
    )
    
    
    104.3
    
    
    
    117.1Unamortized experience losses:Deferred investment losses due to use of market-related
value to determine net benefit cost
    
    
    135.1
    
    
    
    358.0
    
    
    
    
    
    
    
    Unamortized net actuarial loss
    
    
    1,338.6
    (1)
    
    
    1,119.7
    (1)
    
    
    103.0
    
    
    
    89.5Accrued benefit asset (liability) on the Consolidated Balance Sheet
    $
    
    840.6
    
    $
    
    690.1
    
    
    $
    (248.4
    )
    
    $
    (226.6
    )
 (1)
  2004 Annual Report
    
    
    71




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The accrued benefit asset (liability) is included on the Companys Consolidated Balance Sheet
as follows: Pensions
    
    
    Other benefits(in millions)
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Accounts receivable
    
    $
    4.5
    
    
    $
    
    
    
    $
    
    
    
    $
    Other assets and deferred charges
    
    
    838.3
    
    
    
    693.9
    
    
    
    
    
    
    
    Accounts payable and accrued liabilities
    
    
    (0.3
    )
    
    
    (0.3
    )
    
    
    (18.7
    )
    
    
    (24.8
    )Other long-term liabilities
    
    
    (1.9
    )
    
    
    (3.5
    )
    
    
    (229.7
    )
    
    
    (201.8
    )Accrued benefit asset (liability) on
the Consolidated Balance Sheet
    
    $
    840.6
    
    
    $
    690.1
    
    
    $
    (248.4
    )
    
    $
    (226.6
    )
 The measurement date used to determine the plan assets and the accrued benefit obligation is
December 31 (November 30 for U.S. plans). The most recent actuarial valuations for pension funding
purposes were performed as at January 1, 2004. The next actuarial valuations for pension funding
purposes will be performed as at January 1, 2005. Included in the benefit obligation and fair value of fund assets at year end were the following
amounts in respect of plans where the benefit obligation exceeded the fund assets: Pensions
    
    
    Other benefits(in millions)
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Benefit obligation
    
    $
    (6,827.0
    )
    
    $
    (6,525.3
    )
    
    $
    (469.4
    )
    
    $
    (450.4
    )Fair value of fund assets
    
    
    6,222.7
    
    
    
    5,771.6
    
    
    
    12.1
    
    
    
    17.2$
    (604.3
    )
    
    $
    (753.7
    )
    
    $
    (457.3
    )
    
    $
    (433.2
    )
 Actuarial assumptions used were approximately: (percentage)
    
    2004
    
    
    2003
    
    
    2002Benefit obligation at December 31:Discount rate
    
    
    6.00
    
    
    
    6.25
    
    
    
    6.75Projected future salary increases
    
    
    3.00
    
    
    
    3.00
    
    
    
    3.00Health care cost trend rate
    
    
    8.50
    (1)
    
    
    9.00
    (2)
    
    
    6.90
    (2)Benefit cost for year ended December 31:Discount rate
    
    
    6.25
    
    
    
    6.75
    
    
    
    6.75Expected rate of return on fund assets
    
    
    8.00
    
    
    
    8.00
    
    
    
    8.00Projected future salary increases
    
    
    3.00
    
    
    
    3.00
    
    
    
    3.00Health care cost trend rate
    
    
    9.00
    (1)
    
    
    6.90
    (2)
    
    
    7.50
    (2)
 (1)
 (2)
  72
    
    
    2004 Annual Report




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##### Table of Contents



Assumed health care cost trend rates have a significant effect on the amounts reported for the
health care plans. A one-percentage-point change in the assumed health care cost trend rate would
have the following effects: One percentage
    
    
    One percentage(in millions)
    
    point increase
    
    
    point decreaseEffect on the total of service and interest costs (1)
    
    $
    (1.4
    )
    
    $
    1.3Effect on post-retirement benefit obligation (1)
    
    $
    (14.2
    )
    
    $
    14.0
 (1)
 Plan Assets   Current permissible
    
    
    Percentage of plan assets at December 31Asset allocation (percentage)
    
    range
    
    
    2004
    
    
    2003Equity securities
    
    
    51  57
    
    
    
    55.1
    
    
    
    54.2Debt securities
    
    
    37  43
    
    
    
    40.7
    
    
    
    41.2Real estate and other
    
    
    4  8
    
    
    
    4.2
    
    
    
    4.6Total
    
    
    
    
    
    
    100.0
    
    
    
    100.0
 The Companys investment strategy is to achieve a long-term (five- to 10-year period) real rate of
return of 5.5 %, net of all fees and expenses. The Companys best estimate of long-term inflation
of 2.5 % yields a long-term nominal target of 8.0 %, net of all fees and expenses. In identifying
the above asset allocation ranges, consideration was given to the long-term nature of the
underlying plan liabilities, the solvency and going-concern financial position of the plan,
long-term return expectations and the risks associated with key asset classes as well as the
relationships of their returns with each other, inflation and interest rates. When advantageous and
with due consideration, derivative instruments may be utilized, provided the total value of the
underlying asset represented by financial derivatives is limited to 20 % of the market value of the
fund. At December 31, 2004, fund assets consisted primarily of listed stocks and bonds, including 335,300
CPRL Common Shares (2003  285,000) at a market value of $13.8 million (2003  $10.4 million) and
6.91 % Secured Equipment Notes issued by CPRL at par value of $4.3 million (2003  $1.4 million)
and at market value of $4.9 million (2003  $1.5 million). Cash Flows   Defined Contribution Plan    2004 Annual Report
    
    
    73




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##### Table of Contents



Post-employment Restructuring Benefits   (in millions)
    
    2004
    
    
    2003Change in liability:Restructuring labour liability at January 1
    
    $
    297.3
    
    
    $
    239.7Plan adjustment
    
    
    (17.4
    )
    
    
    124.0Settlement gain
    
    
    (19.0
    )
    
    
    Interest cost
    
    
    17.1
    
    
    
    14.7Benefits paid
    
    
    (52.2
    )
    
    
    (68.4
    )Foreign currency changes
    
    
    (6.1
    )
    
    
    (12.7
    )Restructuring labour liability at December 31
    
    
    219.7
    
    
    
    297.3Unfunded restructuring labour amount
    
    
    (219.7
    )
    
    
    (297.3
    )Unamortized net transitional amount
    
    
    (50.0
    )
    
    
    (60.9
    )Accrued restructuring labour liability on the Consolidated Balance Sheet
    
    $
    (269.7
    )
    
    $
    (358.2
    )
 21.  STOCK-BASED COMPENSATION   Replacement Options and SARs   By agreement between CPRL and its former affiliates, the difference between the strike price and
the exercise price of SARs of the former affiliates held by CPRL employees is recognized as an
expense by CPRL. The difference between the strike price and the exercise price of CPRL SARs held
by employees of the former affiliates is recovered from the former affiliates. SARs are attached to 50 % of the options and there is a one-to-one cancellation ratio between those
options and SARs. Stock Option Plans and SARs    74
    
    
    2004 Annual Report




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##### Table of Contents



Pursuant to the employee plan, options may be exercised upon vesting, which is between 24 and 36
months after the grant date, and will expire after 10 years. Some options vest after 48 months,
unless certain performance targets are achieved, in which case vesting is accelerated. These
options expire five years after the grant date. At December 31, 2004, there were 3,213,843 (2003  4,870,699; 2002  6,373,659) Common Shares
available for the granting of future options under the stock option plans, out of the 11,500,000
Common Shares currently authorized. With the granting of options, employees may be simultaneously granted SARs equivalent to one-half
the number of regular options granted. A SAR entitles the holder to receive payment of an amount
equal to the excess of the market value of a Common Share at the exercise date of the SAR over the
related option exercise price. On an ongoing basis, a liability for SARs is accrued on the
incremental change in the market value of the underlying stock and amortized to income over the
vesting period. SARs may be exercised no earlier than two years and no later than 10 years after
the grant date. Where an option granted is a tandem award, the holder can choose to exercise an option or a SAR of
equal intrinsic value. The following is a summary of the Companys fixed stock option plan as of December 31: 2004
    
    
    2003Weighted
    
    
    
    
    
    
    WeightedNumber of
    
    
    average
    
    
    Number of
    
    
    averageoptions
    
    
    exercise price
    
    
    options
    
    
    exercise priceOutstanding, January 1
    
    
    6,226,674
    
    
    $
    28.20
    
    
    
    4,873,791
    
    
    $
    26.61New options granted
    
    
    1,741,400
    
    
    
    32.50
    
    
    
    1,649,580
    
    
    
    31.48Exercised
    
    
    (131,450
    )
    
    
    19.33
    
    
    
    (150,077
    )
    
    
    13.45Forfeited/cancelled
    
    
    (83,494
    )
    
    
    28.63
    
    
    
    (144,210
    )
    
    
    27.69Expired
    
    
    (1,050
    )
    
    
    9.83
    
    
    
    (2,410
    )
    
    
    10.20Outstanding, December 31
    
    
    7,752,080
    
    
    $
    29.32
    
    
    
    6,226,674
    
    
    $
    28.20Options exercisable at December 31
    
    
    1,422,398
    
    
    $
    24.60
    
    
    
    908,209
    
    
    $
    20.96
 At December 31, 2004, the details of the stock options outstanding were as follows: Options outstanding
    
    
    Options exercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber of
    
    
    average years
    
    
    average
    
    
    Number of
    
    
    averageRange of exercise prices
    
    options
    
    
    to expiration
    
    
    exercise price
    
    
    options
    
    
    exercise price$11.11  $14.61
    
    
    322,163
    
    
    
    4
    
    
    $
    14.01
    
    
    
    322,163
    
    
    $
    14.01$15.61  $18.96
    
    
    146,152
    
    
    
    3
    
    
    $
    16.84
    
    
    
    146,152
    
    
    $
    16.84$27.62  $36.64
    
    
    7,283,765
    
    
    
    8
    
    
    $
    30.24
    
    
    
    954,083
    
    
    $
    29.37Total
    
    
    7,752,080
    
    
    
    7
    
    
    $
    29.32
    
    
    
    1,422,398
    
    
    $
    24.60
  2004 Annual Report
    
    
    75




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Deferred Share Unit Plan   Key employees may choose to receive DSUs in lieu of cash payments for certain incentive programs.
In addition, when acquiring Common Shares to meet share ownership targets, key employees may be
granted a matching number of DSUs up to 33 % of the shares and DSUs acquired during the first six
months after becoming eligible under the plan and, thereafter, up to 25 %. Key employees have five
years to meet their ownership targets. An expense to income for DSUs is recognized over the vesting period for both the initial
subscription price and the change in value between reporting periods. At December 31, 2004, there
were 291,693 (2003  238,690) DSUs outstanding. In 2004, 11,355 (2003  8,594) DSUs were redeemed. Employee Share Purchase Plan   The Company contributed $1,000 (US$650) for the first $1,000 contributed by each employee who
enrolled in the plan prior to December 31, 2001. At December 31, 2004, there were 10,289 (2003  9,072; 2002  9,746) participants in the plan. The
total number of shares purchased in 2004 on behalf of participants, including the Company
contribution, was 349,236 (2003  652,040; 2002  1,023,624) shares. In 2004, the Companys
contributions totalled $6.8 million (2003  $6.7 million; 2002  $11.3 million). Additional Fair Value Disclosure   2004
    
    
    2003
    
    
    2002(Restated -
    
    
    (Restated -see Note 2)
    
    
    see Note 2)Net income (in millions)
    As reported
    $
    413.0
    
    
    $
    401.3
    
    
    $
    487.5Pro forma
    $
    411.0
    
    
    $
    399.2
    
    
    $
    484.5Basic earnings per share (in dollars)
    As reported
    $
    2.60
    
    
    $
    2.53
    
    
    $
    3.08Pro forma
    $
    2.59
    
    
    $
    2.52
    
    
    $
    3.06Diluted earnings per share (in dollars)
    As reported
    $
    2.60
    
    
    $
    2.52
    
    
    $
    3.06Pro forma
    $
    2.58
    
    
    $
    2.51
    
    
    $
    3.04
  76
    
    
    2004 Annual Report




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##### Table of Contents



Under the fair value method, the fair value of options at the grant date was $9.5 million for
options issued in 2004 (2003  $9.5 million) and the pro forma value at the grant date was $8.4
million for options issued in 2002. The weighted average fair value assumptions were approximately: 2004
    
    
    2003
    
    
    2002Expected option life (years)
    
    
    4.50
    
    
    
    4.41
    
    
    
    4.41Risk-free interest rate
    
    
    4.15
    %
    
    
    4.14
    %
    
    
    4.45
    %Expected stock price volatility
    
    
    28
    %
    
    
    30
    %
    
    
    30
    %Expected annual dividends per share
    
    $
    0.50
    
    
    $
    0.50
    
    
    $
    0.51Weighted average fair value of options granted during the year
    
    $
    8.04
    
    
    $
    8.49
    
    
    $
    7.88
 22.  COMMITMENTS AND CONTINGENCIES   In the fourth quarter of 2004, CPR recorded a charge for environmental remediation at a specific
property (see Note 3). The estimated cost of remediation may change as new information becomes
available or new developments occur. At December 31, 2004, the Company had committed to future capital expenditures amounting to $577.3
million for years 2005 to 2018. At December 31, 2004, the Company had a committed unused line of credit of $545.0 million available
for short-term and long-term financing, repayable five years after signing and prepayable at the
Companys option. The interest rate varies based on bank prime, Bankers Acceptances or the London
InterBank Offered Rate. Minimum payments under operating leases were estimated at $633.8 million in aggregate, with annual
payments in each of the five years following 2004 of (in millions): 2005  $146.7; 2006  $123.2;
2007  $92.7; 2008  $69.4; 2009  $43.0. Guarantees    
    residual value guarantees on operating lease commitments of $218.9 million at December
31, 2004;
    guarantees to pay other parties in the event of the occurrence of specified events,
including damage to equipment, in relation to assets used in the operation of the railway
through operating leases, rental agreements, easements, trackage and interline agreements;
and
    indemnifications of certain tax-related payments incurred by lessors and lenders. The maximum amount that could be payable under these guarantees, excluding residual value
guarantees, cannot be reasonably estimated due to the nature of certain of these guarantees. All or
a portion of amounts paid under guarantees to pay other parties in the event of the occurrence of
specified events could be recoverable from other parties or through insurance. The Company has
accrued for all guarantees that it expects to pay. At December 31, 2004, these accruals amounted to
$8.3 million (2003  $9.0 million).  2004 Annual Report
    
    
    77




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##### Table of Contents



Indemnifications   Pursuant to the bylaws of CPRL, all current and former Directors and Officers of the Company are
indemnified by the Company. CPR carries a directors and officers liability insurance policy subject
to a maximum coverage limit and certain deductibles in cases where a Director or Officer is
reimbursed by CPR for any loss covered by the policy. 23.  SEGMENTED INFORMATIONOperating Segment   At December 31, 2004, one customer comprised 11.7 % of total revenues. At December 31, 2004,
accounts receivable from this customer represented 12.4 % of CPRs total accounts receivable. At
December 31, 2003 and 2002, no customers revenues were greater than 10 % of total revenues. Geographic Information  (in millions)
    
    Canada
    
    
    United States
    
    
    Total2004Revenues
    
    $
    2,926.7
    
    
    $
    976.2
    
    
    $
    3,902.9Net properties
    
    $
    6,832.8
    
    
    $
    1,560.7
    
    
    $
    8,393.52003Revenues
    
    $
    2,683.9
    
    
    $
    976.8
    
    
    $
    3,660.7Net properties (Restated  see Note 2)
    
    $
    6,603.6
    
    
    $
    1,616.0
    
    
    $
    8,219.62002Revenues
    
    $
    2,607.5
    
    
    $
    1,058.1
    
    
    $
    3,665.6Net properties (Restated  see Note 2)
    
    $
    6,150.9
    
    
    $
    2,001.9
    
    
    $
    8,152.8
 The Companys accounts have been adjusted to reflect an accounting basis that is more comparable
with that employed by other Class 1 railways in North America. The railways principal subsidiaries
present unconsolidated financial statements in accordance with generally accepted accounting
practices for railways as prescribed in the regulations of the Canadian Transportation Agency in
Canada and the Surface Transportation Board in the United States. The condensed income statement and balance sheet information, which follows, is for the Canadian
operations and has been prepared in accordance with the Uniform Classification of Accounts issued
by the Canadian Transportation Agency in Canada. The changes required to consolidate the Canadian
operations are identified as consolidating entries with the exception of amounts adjusting current
assets and liabilities, which are eliminations of inter-company balances between countries.  78
    
    
    2004 Annual Report




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##### Table of Contents



Consolidating Information  2004  Other
    
    
    Consolidating(in millions)
    
    Canada
    
    
    United States
    
    
    countries
    
    
    entries
    
    
    TotalRevenues
    
    $
    2,923.6
    
    
    $
    976.2
    
    
    $
    
    
    
    $
    3.1
    
    
    $
    3,902.9Operating expenses
    
    
    2,449.2
    
    
    
    876.0
    
    
    
    0.2
    
    
    
    (139.1
    )
    
    
    3,186.3Operating income (loss)
    
    
    474.4
    
    
    
    100.2
    
    
    
    (0.2
    )
    
    
    142.2
    
    
    
    716.6Interest and other charges
    
    
    225.7
    
    
    
    38.8
    
    
    
    (14.1
    )
    
    
    4.3
    
    
    
    254.7Foreign exchange (gain) loss on long-term
debt
    
    
    (114.1
    )
    
    
    
    
    
    
    31.7
    
    
    
    (12.0
    )
    
    
    (94.4
    )Income taxes
    
    
    97.0
    
    
    
    19.8
    
    
    
    0.7
    
    
    
    25.8
    
    
    
    143.3Net income (loss)
    
    $
    265.8
    
    
    $
    41.6
    
    
    $
    (18.5
    )
    
    $
    124.1
    
    
    $
    413.0Current assets
    
    $
    848.1
    
    
    $
    205.0
    
    
    $
    5.1
    
    
    $
    (66.2
    )
    
    $
    992.0Net properties
    
    
    5,182.0
    
    
    
    1,552.5
    
    
    
    
    
    
    
    1,659.0
    
    
    
    8,393.5Other long-term assets
    
    
    1,060.1
    
    
    
    81.1
    
    
    
    403.4
    
    
    
    (430.3
    )
    
    
    1,114.3Total assets
    
    $
    7,090.2
    
    
    $
    1,838.6
    
    
    $
    408.5
    
    
    $
    1,162.5
    
    
    $
    10,499.8Current liabilities
    
    $
    1,065.7
    
    
    $
    278.7
    
    
    $
    9.5
    
    
    $
    (65.7
    )
    
    $
    1,288.2Long-term liabilities
    
    
    4,122.6
    
    
    
    1,025.9
    
    
    
    
    
    
    
    80.7
    
    
    
    5,229.2Shareholders equity
    
    
    1,901.9
    
    
    
    534.0
    
    
    
    399.0
    
    
    
    1,147.5
    
    
    
    3,982.4Total liabilities and shareholders equity
    
    $
    7,090.2
    
    
    $
    1,838.6
    
    
    $
    408.5
    
    
    $
    1,162.5
    
    
    $
    10,499.8
 Consolidating Information  2003 (Restated  see Note 2)  Other
    
    
    Consolidating(in millions)
    
    Canada
    
    
    United States
    
    
    countries
    
    
    entries
    
    
    TotalRevenues
    
    $
    2,681.0
    
    
    $
    976.8
    
    
    $
    
    
    
    $
    2.9
    
    
    $
    3,660.7Operating expenses
    
    
    2,374.3
    
    
    
    943.4
    
    
    
    
    
    
    
    (142.6
    )
    
    
    3,175.1Operating income
    
    
    306.7
    
    
    
    33.4
    
    
    
    
    
    
    
    145.5
    
    
    
    485.6Interest and other charges
    
    
    225.9
    
    
    
    26.5
    
    
    
    (4.6
    )
    
    
    4.4
    
    
    
    252.2Foreign exchange (gain) loss on long-term
debt
    
    
    (208.2
    )
    
    
    (31.5
    )
    
    
    52.6
    
    
    
    (22.4
    )
    
    
    (209.5
    )Income taxes
    
    
    (14.9
    )
    
    
    (15.7
    )
    
    
    0.1
    
    
    
    72.1
    
    
    
    41.6Net income (loss)
    
    $
    303.9
    
    
    $
    54.1
    
    
    $
    (48.1
    )
    
    $
    91.4
    
    
    $
    401.3Current assets
    
    $
    606.6
    
    
    $
    221.3
    
    
    $
    3.2
    
    
    $
    (106.9
    )
    
    $
    724.2Net properties
    
    
    5,105.1
    
    
    
    1,567.0
    
    
    
    
    
    
    
    1,547.5
    
    
    
    8,219.6Other long-term assets
    
    
    926.3
    
    
    
    91.8
    
    
    
    
    
    
    
    (5.2
    )
    
    
    1,012.9Total assets
    
    $
    6,638.0
    
    
    $
    1,880.1
    
    
    $
    3.2
    
    
    $
    1,435.4
    
    
    $
    9,956.7Current liabilities
    
    $
    756.7
    
    
    $
    304.1
    
    
    $
    (0.7
    )
    
    $
    (105.5
    )
    
    $
    954.6Long-term liabilities
    
    
    4,260.1
    
    
    
    609.2
    
    
    
    (1.1
    )
    
    
    479.3
    
    
    
    5,347.5Shareholders equity
    
    
    1,621.2
    
    
    
    966.8
    
    
    
    5.0
    
    
    
    1,061.6
    
    
    
    3,654.6Total liabilities and shareholders equity
    
    $
    6,638.0
    
    
    $
    1,880.1
    
    
    $
    3.2
    
    
    $
    1,435.4
    
    
    $
    9,956.7
  2004 Annual Report
    
    
    79




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Consolidating Information  2002 (Restated  see Note 2)  Other
    
    
    Consolidating(in millions)
    
    Canada
    
    
    United States
    
    
    countries
    
    
    entries
    
    
    TotalRevenues
    
    $
    2,607.5
    
    
    $
    1,058.1
    
    
    $
    
    
    
    $
    
    
    
    $
    3,665.6Operating expenses
    
    
    2,078.8
    
    
    
    887.5
    
    
    
    
    
    
    
    (144.7
    )
    
    
    2,821.6Operating income
    
    
    528.7
    
    
    
    170.6
    
    
    
    
    
    
    
    144.7
    
    
    
    844.0Interest and other charges
    
    
    240.7
    
    
    
    29.8
    
    
    
    (6.5
    )
    
    
    
    
    
    
    264.0Foreign exchange (gain) loss on long-term
debt
    
    
    (15.5
    )
    
    
    
    
    
    
    2.1
    
    
    
    
    
    
    
    (13.4
    )Income taxes
    
    
    18.3
    
    
    
    42.3
    
    
    
    0.2
    
    
    
    45.1
    
    
    
    105.9Net income
    
    $
    285.2
    
    
    $
    98.5
    
    
    $
    4.2
    
    
    $
    99.6
    
    
    $
    487.5Current assets
    
    $
    663.1
    
    
    $
    310.2
    
    
    $
    2.0
    
    
    $
    (66.0
    )
    
    $
    909.3Net properties
    
    
    4,991.8
    
    
    
    1,959.7
    
    
    
    
    
    
    
    1,201.3
    
    
    
    8,152.8Other long-term assets
    
    
    520.0
    
    
    
    82.1
    
    
    
    0.1
    
    
    
    
    
    
    
    602.2Total assets
    
    $
    6,174.9
    
    
    $
    2,352.0
    
    
    $
    2.1
    
    
    $
    1,135.3
    
    
    $
    9,664.3Current liabilities
    
    $
    1,242.0
    
    
    $
    325.1
    
    
    $
    (0.6
    )
    
    $
    (68.7
    )
    
    $
    1,497.8Long-term liabilities
    
    
    3,835.0
    
    
    
    734.3
    
    
    
    (1.3
    )
    
    
    230.2
    
    
    
    4,798.2Shareholders equity
    
    
    1,097.9
    
    
    
    1,292.6
    
    
    
    4.0
    
    
    
    973.8
    
    
    
    3,368.3Total liabilities and shareholders equity
    
    $
    6,174.9
    
    
    $
    2,352.0
    
    
    $
    2.1
    
    
    $
    1,135.3
    
    
    $
    9,664.3
 24. RECLASSIFICATION   25. SUPPLEMENTARY DATAReconciliation of Canadian and United States Generally Accepted Accounting Principles   Accounting for Derivative Instruments and Hedging    80
    
    
    2004 Annual Report




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##### Table of Contents



Pensions and Post-retirement Benefits   Prior to January 1, 2000, all actuarial gains and losses were amortized under Canadian GAAP. Upon
transition to the CICA Section 3461 effective January 1, 2000, all unamortized gains and losses,
including prior service costs, were accumulated into a net transitional asset, which is being
amortized to income over approximately 12 years. This created a difference compared with U.S. GAAP
in 2004, 2003 and 2002, under which prior service costs continued to be amortized over the expected
average remaining service period and all other net gains accumulated prior to January 1, 2000, fell
within the corridor. In 2004, the difference was reduced due to amortization of losses outside the
corridor for Canadian GAAP (see Note 20). Post-employment Benefits   Termination and Severance Benefits   Stock-based Compensation   Internal Use Software    2004 Annual Report
    
    
    81




---



##### Table of Contents



Capitalization of Interest   Income Taxes   Comprehensive Income   Assets Purchased Through Conditional Sales Agreements   Effective April 1, 2003, the Company early adopted on a prospective basis the CICA Accounting
Guideline 15 Consolidation of Variable Interest Entities (AcG 15), which harmonizes with FASB
Interpretation No. 46 Consolidation of Variable Interest Entities  an Interpretation of ARB No.
51 (FIN 46). Under AcG 15, when the majority equity owner of a VIE holds an equity ownership
representing less than 10 % of the total assets of the VIE, the primary beneficiary of the VIE is
required to consolidate the VIE. The Company has one VIE, which holds rail cars previously acquired
through a conditional sales agreement, of which it is the primary beneficiary, thus meeting the
criteria for consolidation. There is no difference in treatment between U.S. GAAP and Canadian GAAP
after April 1, 2003. Impairment or Disposal of Long-lived Assets    82
    
    
    2004 Annual Report




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##### Table of Contents



Additional Minimum Pension Liability   Offsetting Contracts   Asset Retirement Obligations   Future Accounting Changes   Statement of Cash Flows    2004 Annual Report
    
    
    83




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##### Table of Contents



Comparative Income Statement   2004
    
    
    2003
    
    
    2002(Restated 
    
    
    (Restated (in millions)
    
    
    
    
    see Note 2)
    
    
    see Note 2)Net income  Canadian GAAP
    
    $
    413.0
    
    
    $
    401.3
    
    
    $
    487.5Increased (decreased) by:Pension costs
    
    
    (0.3
    )
    
    
    (44.2
    )
    
    
    (44.8
    )Post-retirement benefits
    
    
    8.6
    
    
    
    8.6
    
    
    
    8.3Post-employment benefits
    
    
    (0.3
    )
    
    
    (6.2
    )
    
    
    (0.5
    )Termination and severance benefits
    
    
    (9.1
    )
    
    
    (10.3
    )
    
    
    (14.7
    )Internal use software  additions
    
    
    (6.4
    )
    
    
    (9.9
    )
    
    
    (9.9
    )Internal use software  depreciation
    
    
    5.4
    
    
    
    4.4
    
    
    
    3.5Conditional sales agreements
    
    
    
    
    
    
    0.8
    
    
    
    (1.1
    )Asset retirement obligations
    
    
    
    
    
    
    
    
    
    
    12.5Stock-based compensation
    
    
    (1.8
    )
    
    
    (4.2
    )
    
    
    (6.2
    )(Loss) gain on ineffective portion of hedges
    
    
    (16.1
    )
    
    
    25.4
    
    
    
    Capitalized interest  additions
    
    
    4.2
    
    
    
    5.1
    
    
    
    5.7Capitalized interest  depreciation
    
    
    (3.7
    )
    
    
    (3.6
    )
    
    
    (3.5
    )Future (deferred) income tax recovery on the above items
    
    
    6.7
    
    
    
    14.2
    
    
    
    18.8Income, before cumulative catch-up adjustment  U.S. GAAP
    
    
    400.2
    
    
    
    381.4
    
    
    
    455.6Cumulative catch-up adjustment on adoption of FASB 143, net of tax
    
    
    
    
    
    
    (23.5
    )
    
    
    Net income  U.S. GAAP
    
    $
    400.2
    
    
    $
    357.9
    
    
    $
    455.6Other comprehensive income:Unrealized foreign exchange (loss) gain on net investment
in self-sustaining U.S. subsidiaries
    
    
    (50.6
    )
    
    
    (188.6
    )
    
    
    (8.3
    )Unrealized foreign exchange gain on designated net investment hedge (net of
tax)
    
    
    40.3
    
    
    
    147.2
    
    
    
    8.3Other changes in foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    (3.2
    )Minimum pension liability adjustment
    
    
    20.8
    
    
    
    (177.7
    )
    
    
    (394.0
    )Change in fair value of derivative instruments
    
    
    39.5
    
    
    
    13.6
    
    
    
    25.9Gain on derivative instruments realized in net income
    
    
    (26.0
    )
    
    
    (4.2
    )
    
    
    Future (deferred) income tax (expense) recovery on the above items
    
    
    (22.6
    )
    
    
    55.4
    
    
    
    149.0Comprehensive income
    
    $
    401.6
    
    
    $
    203.6
    
    
    $
    233.3Earnings per share  U.S. GAAPBasic earnings per share
    
    $
    2.52
    
    
    $
    2.26
    
    
    $
    2.87Diluted earnings per share
    
    $
    2.51
    
    
    $
    2.25
    
    
    $
    2.86Basic earnings per share, before cumulative catch-up adjustment
    
    $
    2.52
    
    
    $
    2.41
    
    
    $
    2.87Diluted earnings per share, before cumulative catch-up adjustment
    
    $
    2.51
    
    
    $
    2.40
    
    
    $
    2.86
  84
    
    
    2004 Annual Report




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A summary of operating income resulting from Canadian and U.S. GAAP differences is as follows: 2004
    
    
    2003
    
    
    2002(Restated 
    
    
    (Restated (in millions)
    
    
    
    
    see Note 2)
    
    
    see Note 2)Operating incomeCanadian GAAP
    
    $
    716.6
    
    
    $
    485.6
    
    
    $
    844.0U.S. GAAP
    
    $
    697.1
    
    
    $
    419.9
    
    
    $
    795.8
 The differences between U.S. and Canadian GAAP operating income are itemized in the comparative net
income reconciliation, excluding the effect of future income taxes.  2004 Annual Report
    
    
    85




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Consolidated Balance Sheet   2004
    
    
    2003(Restated (in millions)
    
    
    
    
    see Note 2)AssetsLong-term assetsPropertiesCapitalized interest
    
    $
    149.7
    
    
    $
    149.2Internal use software
    
    
    (45.4
    )
    
    
    (44.4
    )Other assets and deferred chargesPension
    
    
    (213.5
    )
    
    
    (213.2
    )Minimum pension liability adjustment
    
    
    (443.2
    )
    
    
    (262.7
    )Long-term receivable (FIN 39)
    
    
    159.6
    
    
    
    150.5Derivative instruments
    
    
    42.9
    
    
    
    Total assets
    
    $
    (349.9
    )
    
    $
    (220.6
    )Liabilities and shareholders equityLong-term liabilitiesDeferred liabilitiesTermination and severance benefits
    
    $
    (36.6
    )
    
    $
    (45.7
    )Post-retirement benefit liability
    
    
    52.5
    
    
    
    61.1Post-employment benefit liability
    
    
    19.1
    
    
    
    18.8Minimum pension liability adjustment
    
    
    125.5
    
    
    
    326.8Derivative instruments
    
    
    7.0
    
    
    
    (37.0
    )Long-term debtMarked-to-market hedged portion of debt
    
    
    8.8
    
    
    
    8.4Bank loan (FIN 39)
    
    
    159.6
    
    
    
    150.5Future (deferred) income tax liability
    
    
    (201.1
    )
    
    
    (217.4
    )Total liabilities
    
    
    134.8
    
    
    
    265.5Shareholders equityShare capitalStock-based compensation
    
    
    8.9
    
    
    
    7.2Contributed surplusStock-based compensation
    
    
    12.3
    
    
    
    12.2Foreign currency translation adjustments
    
    
    (77.0
    )
    
    
    (88.0
    )Retained income
    
    
    (98.4
    )
    
    
    (85.6
    )Accumulated other comprehensive incomeForeign currency translation adjustments
    
    
    15.9
    
    
    
    26.2Minimum pension liability adjustment
    
    
    (361.6
    )
    
    
    (364.5
    )Derivative instruments (FASB 133)
    
    
    15.2
    
    
    
    6.4Total liabilities and shareholders equity
    
    $
    (349.9
    )
    
    $
    (220.6
    )
  86
    
    
    2004 Annual Report




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##### Table of Contents



five-year summary (in millions)
    
    2004
    
    
    2003(1)
    
    
    2002(1)
    
    
    2001(1)
    
    
    2000(1)Income StatementRevenuesFreightGrain
    
    $
    668.2
    
    
    $
    644.4
    
    
    $
    631.4
    
    
    $
    749.3
    
    
    $
    755.2Coal
    
    
    530.3
    
    
    
    444.0
    
    
    
    442.5
    
    
    
    474.1
    
    
    
    387.8Sulphur and fertilizers
    
    
    460.0
    
    
    
    417.4
    
    
    
    401.3
    
    
    
    380.7
    
    
    
    425.8Forest products
    
    
    322.0
    
    
    
    328.8
    
    
    
    360.3
    
    
    
    354.4
    
    
    
    365.9Industrial products
    
    
    430.2
    
    
    
    400.4
    
    
    
    422.1
    
    
    
    430.7
    
    
    
    438.1Intermodal
    
    
    1,029.6
    
    
    
    940.1
    
    
    
    881.9
    
    
    
    803.6
    
    
    
    781.9Automotive
    
    
    288.5
    
    
    
    304.2
    
    
    
    332.4
    
    
    
    303.9
    
    
    
    305.43,728.8
    
    
    
    3,479.3
    
    
    
    3,471.9
    
    
    
    3,496.7
    
    
    
    3,460.1Other (2) (4)
    
    
    174.1
    
    
    
    181.4
    
    
    
    193.7
    
    
    
    201.9
    
    
    
    195.0Total revenues (2) (4)
    
    
    3,902.9
    
    
    
    3,660.7
    
    
    
    3,665.6
    
    
    
    3,698.6
    
    
    
    3,655.1Operating expensesCompensation and benefits
    
    
    1,259.6
    
    
    
    1,163.9
    
    
    
    1,143.4
    
    
    
    1,133.0
    
    
    
    1,157.0Fuel
    
    
    440.0
    
    
    
    393.6
    
    
    
    358.3
    
    
    
    403.5
    
    
    
    409.8Materials
    
    
    178.5
    
    
    
    179.2
    
    
    
    168.7
    
    
    
    182.5
    
    
    
    215.3Equipment rents
    
    
    218.5
    
    
    
    238.5
    
    
    
    255.4
    
    
    
    275.0
    
    
    
    267.0Depreciation
    
    
    407.1
    
    
    
    372.3
    
    
    
    340.2
    
    
    
    326.4
    
    
    
    298.9Purchased services and other
    
    
    610.7
    
    
    
    583.6
    
    
    
    555.6
    
    
    
    550.1
    
    
    
    472.4Total operating expenses, before other specified items (2)
(4)
    
    
    3,114.4
    
    
    
    2,931.1
    
    
    
    2,821.6
    
    
    
    2,870.5
    
    
    
    2,820.4Operating income, before other specified items (2)
(4)
    
    
    788.5
    
    
    
    729.6
    
    
    
    844.0
    
    
    
    828.1
    
    
    
    834.7Other charges, before foreign exchange gains and losses
on long-term debt and other specified items
(2) (3) (4)
    
    
    36.1
    
    
    
    33.5
    
    
    
    21.8
    
    
    
    26.4
    
    
    
    21.0Interest expense
    
    
    218.6
    
    
    
    218.7
    
    
    
    242.2
    
    
    
    209.6
    
    
    
    167.0Income tax expense, before foreign exchange gains
and losses on long-term debt and income tax
on other specified items (2) (3) (4)
    
    
    172.4
    
    
    
    147.3
    
    
    
    181.2
    
    
    
    223.3
    
    
    
    242.4Income, before foreign exchange gains and losses
on long-term debt and other specified items
(2) (3) (4)
    
    
    361.4
    
    
    
    330.1
    
    
    
    398.8
    
    
    
    368.8
    
    
    
    404.3Foreign exchange gain (loss) on long-term debt
(net of income tax) (3)
    
    
    94.4
    
    
    
    224.4
    
    
    
    16.7
    
    
    
    (48.2
    )
    
    
    (39.2
    )Other specified items (net of income tax) (2)
    
    
    (42.8
    )
    
    
    (153.2
    )
    
    
    72.0
    
    
    
    40.4
    
    
    
    131.7Net income
    
    $
    413.0
    
    
    $
    401.3
    
    
    $
    487.5
    
    
    $
    361.0
    
    
    $
    496.8
  2004 Annual Report
    
    
    87




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(1)
 (2)
 (3)
 (4)
 shareholder information COMMON SHARE MARKET PRICES
  2004
    
    
    2003Toronto Stock Exchange (Canadian dollars)
    
    High
    
    
    Low
    
    
    High
    
    
    LowFirst Quarter
    
    
    37.55
    
    
    
    30.32
    
    
    
    33.49
    
    
    
    27.98Second Quarter
    
    
    33.10
    
    
    
    29.36
    
    
    
    33.58
    
    
    
    29.78Third Quarter
    
    
    34.22
    
    
    
    31.60
    
    
    
    34.70
    
    
    
    30.20Fourth Quarter
    
    
    41.55
    
    
    
    32.45
    
    
    
    38.65
    
    
    
    31.92Year
    
    
    41.55
    
    
    
    29.36
    
    
    
    38.65
    
    
    
    27.98
 New York Stock Exchange (U.S. dollars)
    
    High
    
    
    Low
    
    
    High
    
    
    LowFirst Quarter
    
    
    29.13
    
    
    
    22.65
    
    
    
    21.68
    
    
    
    18.98Second Quarter
    
    
    25.17
    
    
    
    21.40
    
    
    
    24.37
    
    
    
    20.99Third Quarter
    
    
    26.25
    
    
    
    23.83
    
    
    
    25.11
    
    
    
    21.96Fourth Quarter
    
    
    34.50
    
    
    
    25.58
    
    
    
    29.25
    
    
    
    23.74Year
    
    
    34.50
    
    
    
    21.40
    
    
    
    29.25
    
    
    
    18.98Number of registered shareholders at year end
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,433Market prices at year endToronto Stock Exchange
    
    
    
    
    
    
    
    
    
    
    
    
    
    CDN$
    41.10New York Stock Exchange
    
    
    
    
    
    
    
    
    
    
    
    
    
    US$
    34.41
  88
    
    
    2004 Annual Report




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SHAREHOLDER
ADMINISTRATION Common Shares   For information concerning dividends, lost share certificates and estate transfers, or for address
and share registration changes, please contact the transfer agent and registrar toll-free within
North America by phone at 1-877-427-7245 or fax at 1-866-249-7775; outside of North America by
phone at 1-514-982-7555 or fax at 1-416-263-9524; by e-mail at service@computershare.com; or by
writing to: Computershare
Trust Company of Canada
100 University Avenue, 9th Floor
Toronto, Ontario Canada M5J 2Y1 4 % CONSOLIDATED DEBENTURE STOCK   for stock denominated in U.S. Currency  The Bank of New York at 1-212-815-5213
or by e-mail at spertsev@bankofny.com;
and
for stock denominated in pounds sterling  BNY Trust Company of Canada at 1-416-933-8504
or by e-mail at mredway@bankofny.com. MARKET FOR SECURITIES   TRADING SYMBOL   DUPLICATE ANNUAL REPORTS   DIRECT DEPOSIT OF DIVIDENDS    2004 Annual Report
    
    
    89




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CORPORATE GOVERNANCE   A detailed description of CPRs approach to corporate governance is contained in its Management
Proxy Circular issued in connection with the 2005 Annual and Special Meeting of Shareholders. GOVERNANCE LISTING STANDARDS   PRESIDENT AND CHIEF
EXECUTIVE OFFICER CERTIFICATION REGARDING COMPLIANCE WITH NYSE LISTING STANDARDS  Sarbanes-Oxley Act of 2002
  90
    
    
    2004 Annual Report




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DIRECTORS & COMMITTEES  Stephen E. Bachand(1) (2) (4)
Retired President and Chief Executive Officer
Canadian Tire Corporation, Limited
Ponte Vedra Beach, Florida John E. Cleghorn, O.C., F.C.A.(1) (2) (5)
Chairman
SNC-Lavalin Group Inc.
Toronto, Ontario Tim W. Faithfull(2) (3) (4)
Retired President and Chief Executive Officer
Shell Canada Limited
Oxford, England James E. Newall, O.C.(2)
Chairman
Canadian Pacific Railway Limited, and
NOVA Chemicals Corporation
Calgary, Alberta Dr. James R. Nininger(2) (3) (4)
Retired President and Chief Executive Officer
The Conference Board of Canada
Ottawa, Ontario Madeleine Paquin(1) (2) (3)
President and Chief Executive Officer
Logistec Corporation
Montreal, Quebec Michael E.J. Phelps, O.C.(2) (3) (4)
Chairman
Dornoch Capital Inc.
West Vancouver, British Columbia Roger Phillips, O.C.(1) (2) (5)
Retired President and Chief Executive Officer
IPSCO Inc.
Regina, Saskatchewan Robert J. Ritchie
President and Chief Executive Officer
Canadian Pacific Railway Limited
Calgary, Alberta Michael W. Wright(1) (2) (4)
Retired Chairman of the Board and Chief Executive Officer
SUPERVALU INC.
Longboat Key, Florida (1)
 (2)
 (3)
 (4)
 (5)
 (6)
 SENIOR OFFICERS OF THE COMPANY  James E. Newall, O.C.
Chairman of the Board
Calgary, Alberta Robert J. Ritchie(6)
President and Chief Executive Officer
Calgary, Alberta Fred Green(6)
Executive Vice-President and Chief Operating Officer
Calgary, Alberta Michael T. Waites(6)
Executive Vice-President and Chief Financial Officer,   Chief
Executive Officer U.S. Network
Municipal District of Rockyview, Alberta Allen H. Borak(6)
Vice-President, Information Services
Calgary, Alberta Paul Clark(6)
Vice-President, Communications and Public Affairs
Calgary, Alberta Neal Foot(6)
Senior Vice-President, Operations
Calgary, Alberta Paul A. Guthrie(6)
Vice-President, Law
Municipal District of Rockyview, Alberta R. Andrew Shields(6)
Vice-President, Human Resources and Industrial Relations
Calgary, Alberta Marcella M. Szel(6)
Senior Vice-President, Bulk Commodities   and
Government Affairs
Calgary, Alberta W. Paul Bell
Vice-President, Investor Relations
Calgary, Alberta J. Joseph Doolan
Vice-President and Treasurer
Municipal District of Rockyview, Alberta Brian Grassby
Vice-President and Comptroller
Calgary, Alberta Robert V. Horte
Corporate Secretary
Calgary, Alberta
    2004 Annual Report
    
    
    91




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##### Table of Contents



glossary of terms  Carloadsrevenue-generating shipments of containers, trailers and freight cars CBPU.S. Customs and Border Protection CBSACanada Border Services Agency CICACanadian Institute of Chartered Accountants CICA AcGCanadian Institute of Chartered Accountants Accounting Guidelines Company, CPRLCanadian Pacific Railway Limited CPRCPRL and its subsidiaries C-TPATCBPs Customs-Trade Partnership Against Terrorism program D&HDelaware and Hudson Railway Company, Inc., a wholly-owned indirect U.S. subsidiary of CPRL DSOPCPRLs Directors Stock Option Plan EPSearnings per share FOAFinal Offer Arbitration pursuant to the provisions of the Canada Transportation Act Foreign Exchangethe value of the Canadian dollar relative to the U.S. dollar FX on LTDforeign exchange gains and losses on long-term debt GAAPCanadian generally accepted accounting principles
 GTMs or gross ton-milesthe movement of total train weight over a distance of one mile (total train
weight is comprised of the weight of the freight cars, their contents and any inactive locomotives) IOPCPRs Integrated Operating Plan, the foundation for scheduled railway operations LIBORLondon Interbank Offered Rate MD&ACPRLs 2004 Managements Discussion and Analysis MSOIPCPRLs Management Stock Option Incentive Plan Operating Ratiothe ratio of total operating expenses to total revenues PIPCBSAs Partners in Protection program RTMs or revenue ton-milesthe movement of one revenue-producing ton of freight over a distance of
one mile Soo LineSoo Line Railroad Company, a wholly-owned indirect U.S. subsidiary of CPRL STBU.S. Surface Transportation Board VACISVehicle and Cargo Inspection System installed at U.S.-Canada border crossings WCBWorkers Compensation Board WTIWest Texas Intermediate, a commonly used index for the price of a barrel of crude oil
    92
    
    
    2004 Annual Report




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##### Table of Contents



(PICTURE)  CPR is in a solid position and poised for an even better future. This is an exciting time for shippers, employees and shareholders.
 We have a dynamic and robust bulk commodity franchise feeding into export position for Asia off
the West Coast. We are increasing the profitability of our fast-growing intermodal franchise,
leveraging CPRs transcontinental reach and lines feeding into the Chicago hub from West and East
coast ports. Our network of cross-border gateways and reload partners offer significant upside in
CPRs merchandise business.




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##### Table of Contents



CPR is reshaping its business lines. Service is improving, rail operations are becoming more
fluid and productivity is climbing while demand continues to grow. As
a result, CPR is commanding value for its service and increasing margins, and will drive more of its growth to the bottom line.  Bulk
grain, coal, sulphur and
fertilizers for overseas and North
American markets   
    Operating every train at maximum capacity and using higher capacity freight cars  
    Matching customer infrastructure and operations capacity to track capacity based on siding lengths  
    Powering up trains in winter using innovative approaches such as tail-end locomotives that enable CPR to run long, heavy trains even in adverse weather  
    Focusing the efforts of a new Grain Shipment Management Team on the elevator-to-port
pipeline for improved fluidity, better equipment utilization and reduced empty car miles  
    Entering into co-production agreements and alliances with other railways that allow CPR to add more cars to each train across gateways  
    Making targeted infrastructure investments to expand capacity for continued growth
 Intermodal
consumer goods
shipped in containers that can
move by train, truck and ship   
    Acquiring a new fleet of high-capacity double-stack freight cars  
    Using remote-control locomotives at mid-train or tail end to run long trains, regardless of terrain and weather  
    Extending sidings to accommodate long trains  
    Employing a West Coast container capacity allocation system to reduce demand volatility and balance import- export flows for improved fluidity  
    Redeploying assets to higher-margin markets from under-performing regional markets  
    Converting the truck trailer business to more efficient containers, which can be double-stacked  
    Co-locating customer distribution facilities with major intermodal terminals  
    Revising pricing strategies to reflect high demand in a tight-capacity market  
    A new Centralized Operations Group to maintain best practices across all facets of the
intermodal business, maximize fluidity in terminals and enhance service
 Merchandise
forest, industrial
and automotive products that
move from and to many locations   
    Simplifying the collection-and-delivery system, making greater use of road-rail reload
facilities and reconfiguring shipments at customer locations to improve freight car
turnaround and service consistency  
    Developing multi-reload facility villages  
    Operating longer, heavier trains to move more freight per train  
    Expanding CPRs seamless alliances with other railways  
    Creating a centralized pricing team for fast response to new business opportunities  
    Targeting growth and pricing to reflect the value of network capacity




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(MAP)




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(CP LOGO)  2005 Annual and Special Meeting of Shareholders  The Annual and Special Meeting of Shareholders will be held on Thursday, May 5, 2005, at the TELUS
Convention Centre, 120  9th Avenue S.E., Calgary, Alberta, at 9 a.m. Mountain Time.
 Shareholder Services  Shareholders who have inquiries or wish to obtain copies of the Corporations Annual Information
Form may contact Shareholder Services at 1-866-861-4289 or 1-403-319-7538, or by e-mail at
shareholder@cpr.ca, or by writing to:Shareholder Services, Office
of the Corporate Secretary,Canadian Pacific Railway,
Suite 920, Gulf Canada Square,401  9th Avenue S.W., Calgary, Alberta,
Canada T2P 4Z4
 Investor Relations  Financial information, including Canadian Pacific Railways Corporate Profile and Fact Book, is
available on CPRs Website at www.cpr.ca, or by e-mail at investor@cpr.ca, or by contacting: Paul
Bell, Vice-President, Investor Relations,Canadian Pacific
Railway, Suite 500, Gulf Canada Square,401  9th Avenue S.W., Calgary, Alberta, Canada T2P 4Z4
 Communications and Public Affairs  Paul Clark, Vice-President, Communications and Public Affairs, Canadian Pacific Railway, Suite 500,
Gulf Canada Square, 401  9th Avenue S.W., Calgary, Alberta, Canada T2P 4Z4
   Si vous désirez vous procurer la version française du présent rapport, veuillez vous adresser
au : Vice-président exécutif et chef des services
financiers, Canadian Pacific Railway, Suite 500, Gulf Canada Square, 401  9th Avenue S.W.,
Calgary, Alberta T2P 4Z4