##### 



FORM 40-F
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934ORx
    
    ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
 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
    
    (Primary Standard Industrial Classification
    
    (I.R.S. Employer Identification Number)incorporation or organization)
    
    Code 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)
  Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Shares of
    
    New York Stock ExchangeCanadian Pacific Railway LimitedPerpetual 4% Consolidated Debenture Stock
    
    New York Stock Exchangeof Canadian Pacific Railway Company
 None
 None
  x   Annual information form
    
    x   Audited annual financial statements




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##### 



YES     o
    
    NO     x
  YES     x
    
    NO     o
 2




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##### 



PRIOR FILINGS MODIFIED AND SUPERSEDED
  CONSOLIDATED AUDITED ANNUAL FINANCIAL STATEMENTS AND
MANAGEMENTS DISCUSSION AND ANALYSIS
 A. Audited Annual Financial Statements
  B. Managements Discussion and Analysis
   DISCLOSURE CONTROLS AND PROCEDURES
  CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
  3




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##### 



CODE OF BUSINESS ETHICS
 www.cpr.ca
 CODE OF ETHICS FOR CHIEF EXECUTIVE OFFICER AND SENIOR FINANCIAL OFFICERS
 www.cpr.ca
 CORPORATE GOVERNANCE PRINCIPLES AND GUIDELINES
 www.cpr.ca
 COMMITTEE TERMS OF REFERENCE
 www.cpr.ca
 DIRECTOR INDEPENDENCE
  4




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##### 



EXECUTIVE SESSIONS OF NON-MANAGEMENT DIRECTORS
  th
 AUDIT COMMITTEE FINANCIAL EXPERTS
  
  FINANCIAL LITERACY OF AUDIT COMMITTEE MEMBERS
  SERVICE ON OTHER PUBLIC COMPANY AUDIT COMMITTEES
  5




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##### 




    
    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
  Year ended December 31, 2005
    
    
    Year ended December 31, 2004Audit Fees
    
    
    $
    1,086,000
    
    
    
    $
    1,005,000Audit-Related Fees
    
    
    $
    812,540
    
    
    
    $
    574,900Tax Fees
    
    
    $
    243,600
    
    
    
    $
    318,100All Other Fees
    
    
    $
    0
    
    
    
    $
    0TOTAL
    
    
    $
    2,142,140
    
    
    
    $
    1,898,000
  Audit Fees
  Audit-Related Fees
  6




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##### 



Sarbanes-Oxley Act of 2002
 Tax Fees
  All Other Fees
  PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES PROVIDED BY
INDEPENDENT AUDITORS
  OFF-BALANCE SHEET ARRANGEMENTS
  TABLE OF CONTRACTUAL COMMITMENTS
  7




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##### 



UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
 A. Undertaking
  B. Consent to Service of Process
  SIGNATURES
  CANADIAN PACIFIC RAILWAY LIMITED
CANADIAN PACIFIC RAILWAY COMPANY
(Registrants)Signed Donald F. BarnhardtName:
    Donald F. BarnhardtTitle:
    Corporate SecretaryDate:
    March 22, 2006 8




---



##### 



DOCUMENTS FILED AS PART OF THIS REPORT
 1.
    
    Annual Information Form of the Registrants for the year ended December 31, 2005.2.
    
    Annual Report of the Registrants for the year ended December 31, 2005, including Managements
Discussion and Analysis and Audited Consolidated Financial Statements of the Registrants as of
December 31, 2005 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
filed 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
furnished pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 1
 9




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##### 



TABLE OF CONTENTS
 COVER PAGETABLE OF CONTENTSCORPORATE STRUCTUREName, Address and Incorporation Information
    
    
    2INTERCORPORATE RELATIONSHIPSPrincipal Subsidiaries
    
    
    3GENERAL DEVELOPMENT OF THE BUSINESSRecent Developments
    
    
    4DESCRIPTION OF THE BUSINESSOur Background and Network
    
    
    6Strategy
    
    
    6Partnerships, Alliances and Network Efficiency
    
    
    6Network and Right of Way
    
    
    7Business Categories
    
    
    10Freight Revenues
    
    
    10Railway Performance
    
    
    14Performance Indicators
    
    
    14Franchise Investment
    
    
    14Integrated Operating Plan
    
    
    15Information Technology
    
    
    15Labour Productivity and Efficiency
    
    
    16Risk Factors
    
    
    16Safety
    
    
    18Border Security
    
    
    18Labour Relations
    
    
    19Environmental Protection
    
    
    20Regulation and Other Issues
    
    
    21Insurance
    
    
    22Related-party Transactions
    
    
    22DIVIDENDSDeclared Dividends and Dividend Policy
    
    
    23CAPITAL STRUCTUREDescription of Capital Structure
    
    
    24Security Ratings
    
    
    26MARKET FOR SECURITIESStock Exchange Listings
    
    
    27Trading Price and Volume
    
    
    27DIRECTORS AND OFFICERSDirectors
    
    
    29Cease Trade Orders
    
    
    30Senior Officers
    
    
    30Shareholdings of Directors and Officers
    
    
    31LEGAL PROCEEDINGS
    
    
    32TRANSFER AGENTS AND REGISTRARTransfer Agent
    
    
    33INTERESTS OF EXPERTS
    
    
    34AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE INFORMATIONComposition of the Audit, Finance and Risk Management Committee and Relevant Education and Experience
    
    
    35Pre-Approval of Policies and Procedures
    
    
    35Audit, Finance and Risk Management Committee Charter
    
    
    36Audit and Non-Audit Fees and Services
    
    
    41ADDITIONAL INFORMATIONAdditional Company Information
    
    
    42




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##### 



CORPORATE STRUCTURE
 
 Unless the context requires otherwise, our, us, we, CPR and the Company refer to
Canadian Pacific Railway Limited and, where applicable, its subsidiaries, including Canadian
Pacific Railway Company (CPRC).
 
 Name, Address and Incorporation Information
 Canada Business Corporations Act .
  2




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##### 



INTERCORPORATE RELATIONSHIPS
 
 
 Principal Subsidiaries
  Percentage of non-Percentage of
    
    voting securitiesvoting securities
    
    beneficially owned, orIncorporated
    
    held directly or
    
    over which control orPrincipal Subsidiary
    
    under the laws of
    
    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. 3




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##### 



GENERAL DEVELOPMENT OF THE BUSINESS
 
 
 Recent Developments
    
    
    ten projects between Moose Jaw, Saskatchewan, and Calgary, Alberta, to extend sidings
and lay sections of double track;
    
    three projects in Alberta, between Edmonton and Calgary, to extend sidings and build a new siding;
    
    twelve projects between Calgary and the Port of Vancouver to extend sidings and lay sections of double track.
    
    
    CN traffic destined for the eastern U.S. will move in our trains on the D&H line in New
York between Rouses Point and Saratoga Springs under our freight haulage arrangement with
NS;
    
    this CN traffic will then move in NS trains over the D&H line between Saratoga Springs
and the NS connection near Harrisburg, Pennsylvania, under our trackage rights agreements
with NS.
   
    
    NS to provide yard services for CPR at Buffalo, New York;
    
    NS to haul CPR traffic between Buffalo and Binghamton in New York;
    
    CPR to grant trackage rights to NS between Binghamton and Saratoga Springs;
    
    CPR to haul NS traffic between Rouses Point, and Saratoga Springs;
    
    CPR to provide yard services for NS at Binghamton;
    
    NS to grant CPR trackage rights over certain NS lines in the vicinity of Buffalo; and
    
    NS to grant CPR trackage rights between Detroit, Michigan, and Chicago, Illinois.
 4




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##### 



GENERAL DEVELOPMENT OF THE BUSINESS
 
  ® ®
  5




---



##### 



DESCRIPTION OF THE BUSINESS
 
 
 Our Background and Network
    
 Strategy
  
    
    generating quality revenue growth by realizing the benefits of demand growth in our
bulk, intermodal and merchandise business lines with targeted infrastructure capacity
investments linked to global trade opportunities;
    
    improving productivity by leveraging strategic marketing and operating partnerships,
executing a scheduled railway (our Integrated Operating Plan) and driving more value from
existing assets and resources (improving fluidity); and
    
    continuing to develop a dedicated, professional and knowledgeable workforce that is
committed to safety and sustainable financial performance through steady improvement in
profitability, increased cash flow and a competitive return on investment.
 
 Partnerships, Alliances and Network Efficiency
    
    
    a CPR-CN directional running agreement over about 100 miles of parallel CPR and CN track
in Ontario between Waterfall (near Sudbury) and Parry Sound. The trains of both railways
operate eastbound over CNs line and westbound over our line;
    
    a CPR-CN haulage agreement under which CPR transports CN freight over about 300 miles of
CPR track in Ontario between Thunder Bay and Franz;
    
    CPR-CN initiatives in the Port of Vancouver Terminal and B.C. Lower Mainland;
    
    a CPR-NS trackage rights agreement to handle NS traffic over our D&H lines in the U.S. Northeast; and
    
    a CPR-NS track connection at Detroit, Michigan that provides service between eastern
Canada and the U.S. Midwest.
  6




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##### 



DESCRIPTION OF THE BUSINESS
 
   
 Network and Right-of-Way
  
  The Western Corridor: Vancouver-Moose Jaw
 Overview
 Products
 Feeder Lines
 Connections
 7




---



##### 



DESCRIPTION OF THE BUSINESS
 
 Yards and Repair Facilities
 Other
 The Southern Corridor: Moose Jaw-Chicago
 Overview
 Products
 Feeder Lines
   Connections
 Yards and Repair Facilities
 The Central Corridor: Moose Jaw-Toronto
 Overview
 Products
 Feeder Lines
 Connection
 Yards and Repair Facilities
 8




---



##### 



DESCRIPTION OF THE BUSINESS
 
  The Eastern Corridor
 Overview
 Products
 Feeder Lines
 Connections
 Yards and Repair Facilities
 Other
 Right of Way
    9




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##### 



DESCRIPTION OF THE BUSINESS
 
 
 Business Categories
  Business Category
    
    
    2005
    
    
    2004Bulk
    
    
    
    45%
    
    
    
    44%Merchandise
    
    
    
    28%
    
    
    
    29%Intermodal
    
    
    
    27%
    
    
    
    27%
 
 Freight Revenues
  Freight Revenues
    
    
    
    
    
    Fiscal 2005
    
    
    
    
    
    
    Fiscal 2004(in $ millions, except for percentages)
    
    
    
    
    
    Growth
    
    
    
    
    
    
    GrowthRate as
    
    
    
    
    
    
    Rate asCompared
    
    
    
    
    
    
    ComparedFiscal
    
    
    to Fiscal
    
    
    Fiscal
    
    
    to Fiscal
    
    
    FiscalBusiness Category
    
    2005
    
    
    2004
    
    
    2004
    
    
    2003
    
    
    2003BulkGrain
    
    
    754
    
    
    
    12.9 %
    
    
    
    668
    
    
    
    3.7 %
    
    
    
    644Coal
    
    
    729
    
    
    
    37.5 %
    
    
    
    530
    
    
    
    19.4 %
    
    
    
    444Sulphur and fertilizers
    
    
    447
    
    
    
    (2.8)%
    
    
    
    460
    
    
    
    10.0 %
    
    
    
    418Total bulk
    
    
    1,930
    
    
    
    16.4 %
    
    
    
    1,658
    
    
    
    10.1 %
    
    
    
    1,506MerchandiseForest products
    
    
    334
    
    
    
    3.7 %
    
    
    
    322
    
    
    
    (2.1)%
    
    
    
    329Industrial and consumer products
    
    
    543
    
    
    
    12.9 %
    
    
    
    481
    
    
    
    4.6 %
    
    
    
    460Automotive
    
    
    298
    
    
    
    3.1 %
    
    
    
    289
    
    
    
    (4.9)%
    
    
    
    304Total merchandise
    
    
    1,175
    
    
    
    7.6 %
    
    
    
    1,092
    
    
    
    (0.1)%
    
    
    
    1,093Intermodal
    
    
    1,161
    
    
    
    12.2 %
    
    
    
    1,035
    
    
    
    11.8 %
    
    
    
    926Total freight revenues
    
    
    4,266
    
    
    
    12.7 %
    
    
    
    3,785
    
    
    
    7.4 %
    
    
    
    3,525
 Bulk
  Grain
    Canada Transportation Act
 10




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##### 



DESCRIPTION OF THE BUSINESS
 
  Coal
     Sulphur and Fertilizers
  
    
    Sulphur
   
    
    Fertilizers
   Merchandise
    11




---



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DESCRIPTION OF THE BUSINESS
 
 Forest Products
   Industrial and Consumer Products
    Automotive
   Intermodal
    Domestic Intermodal
  International Intermodal
    Expressway
  12




---



##### 



DESCRIPTION OF THE BUSINESS
 
 Yield Management
  Other Business
  Economic Dependence
  13




---



##### 



DESCRIPTION OF THE BUSINESS
 
 
 Railway Performance
  Year ended December 31Performance Indicators
    
    2005
    
    2004
    
    2003
    
    2002
    
    2001Gross ton-miles (GTM) (millions)(1)
    
    
    242,100
    
    
    
    236,451
    
    
    
    221,884
    
    
    
    209,596
    
    
    
    212,928Revenue ton-miles (RTM) (millions)(2)
    
    
    125,303
    
    
    
    123,627
    
    
    
    114,599
    
    
    
    107,689
    
    
    
    110,622Train-miles (thousands)(3)
    
    
    43,054
    
    
    
    41,344
    
    
    
    40,470
    
    
    
    38,299
    
    
    
    38,162Average number of active employees(4)
    
    
    16,448
    
    
    
    16,056
    
    
    
    16,126
    
    
    
    16,116
    
    
    
    16,987Average train weights (tons)(5)
    
    
    5,623
    
    
    
    5,719
    
    
    
    5,483
    
    
    
    5,473
    
    
    
    5,580Traffic density(GTMs per mile of road operated, excluding
track on which CPR has haulage rights
(thousands))
    
    
    17,767
    
    
    
    17,113
    
    
    
    16,023
    
    
    
    15,107
    
    
    
    15,326Employee productivity(GTMs per average active employee (thousands))
    
    
    14,719
    
    
    
    14,727
    
    
    
    13,759
    
    
    
    13,005
    
    
    
    12,535Fuel efficiency(U.S. gallons of fuel per 1,000 GTMs)
    
    
    1.18
    
    
    
    1.20
    
    
    
    1.24
    
    
    
    1.24
    
    
    
    1.25Locomotive utilization(GTMs per active locomotive per day (thousands))
    
    
    658
    
    
    
    675
    
    
    
    664
    
    
    
    673
    
    
    
    681
 Notes:(1)
    
    Gross Ton-Miles of freight measure the 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.)(2)
    
    Revenue ton-miles of freight measure the movement of one revenue-producing ton of
freight over a distance of one mile.(3)
    
    Train-miles measure the distance traveled by the lead locomotive on each train
operating over our track. An increase in GTMs without a corresponding increase in train-miles
indicates higher efficiency.(4)
    
    Average number of active employees is the average number of actively employed
workers for the period. This 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 us but are not currently working. This indicator is
calculated by adding the monthly average employee counts and dividing the total by the number
of months in the period.(5)
    
    Average train weights is the result of dividing GTMs by train-miles. It represents
the average total weight of all our trains operating over our track and track on which we have
running rights.
 
 Franchise Investment
   Locomotive Fleet Modernization
  14




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##### 



DESCRIPTION OF THE BUSINESS
 
  Number of Locomotives(owned and leased)Road Freight
    
    Road
    
    YardAge in Years
    
    AC
    
    DC
    
    Switcher
    
    Switcher
    
    Total0-5
    
    
    294
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2946-10
    
    
    348
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34811-15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16-20
    
    
    
    
    
    
    88
    
    
    
    93
    
    
    
    
    
    
    
    181Over 20
    
    
    
    
    
    
    419
    
    
    
    176
    
    
    
    251
    
    
    
    846Totals
    
    
    642
    
    
    
    507
    
    
    
    269
    
    
    
    251
    
    
    
    1,669
 Railcar Fleet Modernization
   
 Integrated Operating Plan
       
 Information Technology
   15




---



##### 



DESCRIPTION OF THE BUSINESS
 
     
 Labour Productivity and Efficiency
     
 Risk Factors
 Competition
   Economic and Other Conditions
  16




---



##### 



DESCRIPTION OF THE BUSINESS
 
 Fuel Prices
  Foreign Exchange Risk
  Interest Rate Risk
  Regulatory Authorities
 Railway Safety Act
  Environmental Laws and Regulations
    17




---



##### 



DESCRIPTION OF THE BUSINESS
 
  Labour Relations
   Pension Plans
  Indemnifications
   
 Safety
    
 Border Security
  18




---



##### 



DESCRIPTION OF THE BUSINESS
 
     
 Labour Relations
  Labour
Relations  Canada
  
    
    A four-year collective agreement with the Teamsters Canada Rail Conference (TCRC),
elected as bargaining agent by train crew employees in June 2004. The agreement, which
extends to the end of 2006, was ratified on January 17, 2005. Our collective agreement
with the previous bargaining agent expired on December 31,
2002.
    
    A three-year collective agreement with the Teamsters Canada Rail Conference, Maintenance
of Way Employees Division (TCRC-MWD), certified as bargaining agent by track maintenance
employees in July 2004. The agreement, which extends to the end of 2006, was ratified on
March 18, 2005. Our collective agreement with the former bargaining agent expired on
December 31, 2003.
    
    A three-year collective agreement with the Canadian Auto Workers (CAW), representing
employees who maintain and repair locomotives and freight cars. The agreement, which
extends to the end of 2007, was ratified on March 24, 2005.
    
    A five-year collective agreement, extending to the end of 2009, with the International
Brotherhood of Electrical Workers (IBEW), representing signal maintainers. The agreement,
which extends to the end of 2009, was ratified on September 16, 2005.
    
    A Memorandum of Settlement with the Canadian Pacific Police Association (CPPA),
representing CPR Police sergeants and constables. The agreement, which was reached on
January 12, 2006, has been submitted to a ratification vote. Results of the vote and a
decision on the term of the agreement are expected in February 2006.
    
    A Memorandum of Settlement, for a three-year renewal agreement to the end of 2008, with
the Teamsters Canada Rail Conference, Rail Canada Traffic Controllers (TCRC-RCTC),
representing employees who control train traffic. The agreement, which was reached on
January 20, 2006, has been submitted to a ratification vote. Results of the vote are
expected in March 2006.
 Labour
Relations  U.S.
  19




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##### 



DESCRIPTION OF THE BUSINESS
 
      
 Environmental Protection
  Policy
  Ò Ò Ò Ò Ò
  Planning
  Implementation and Operation
    Environmental Contamination
  20




---



##### 



DESCRIPTION OF THE BUSINESS
 
     Checking and Corrective Action
   Management Review
  Expenditures
  
 Regulation and Other Issues
 Railway Safety Act
 Canadian Regulation
    21




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##### 



DESCRIPTION OF THE BUSINESS
 
 Railway Safety Act Canadian Transportation Accident
Investigation and Safety Board Act
 U.S. Regulation
 Staggers Rail Act of 1980
    
 Insurance
  
 Related-party Transactions
  22




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##### 



DIVIDENDS
 
 
 Declared Dividends and Dividend Policy
  Dividend Amount
    
    
    Record Date
    
    
    Payment Date$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$0.1500
    
    
    June 24, 2005
    
    
    July 25, 2005$0.1500
    
    
    September 30, 2005
    
    
    October 31, 2005$0.1500
    
    
    December 30, 2005
    
    
    January 30, 2006$0.1875
    
    
    March 31, 2006
    
    
    April 24, 2006
  23




---



##### 



CAPITAL STRUCTURE
 
 
 Description of Capital Structure
  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 any 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 distribution 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 can 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.
 24




---



##### 



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 Shares: 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).
    
    Dividends Preferential: Except with the consent in writing of the holders of
all outstanding Second Preferred Shares, no dividend can 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.
 25




---



##### 



CAPITAL STRUCTURE
 
 
 Security Ratings
  Approved Rating
    
    
    Long-TermOrganization
    
    
    DebtMoodys Investors Service
    
    
    Baa2Standard & Poors
    
    
    BBBDominion Bond Rating Service
    
    

BBB(high)
   
 26




---



##### 



MARKET FOR SECURITIES
 
 
 Stock Exchange Listings
  
 Trading Price and Volume
  Opening
    
    
    
    High
    
    
    
    Low
    
    
    
    Closing
    
    
    
    Number of
    
    
    
    Volume ofPrice per
    
    
    
    Price per
    
    
    
    Price per
    
    
    
    Price per
    
    
    
    Trades
    
    
    
    SharesMonth
    
    
    Share ($)
    
    
    
    Share ($)
    
    
    
    Share ($)
    
    
    
    Share ($)
    
    
    
    Performed
    
    
    
    TradedJanuary
    
    
    
    41.30
    
    
    
    
    42.20
    
    
    
    
    38.70
    
    
    
    
    42.00
    
    
    
    
    26,976
    
    
    
    
    13,370,864February
    
    
    
    41.80
    
    
    
    
    44.08
    
    
    
    
    41.09
    
    
    
    
    43.87
    
    
    
    
    21,897
    
    
    
    
    10,445,569March
    
    
    
    43.90
    
    
    
    
    46.52
    
    
    
    
    41.55
    
    
    
    
    43.75
    
    
    
    
    27,485
    
    
    
    
    16,967,490April
    
    
    
    43.90
    
    
    
    
    46.09
    
    
    
    
    42.08
    
    
    
    
    43.95
    
    
    
    
    32,878
    
    
    
    
    21,381,092May
    
    
    
    43.95
    
    
    
    
    46.88
    
    
    
    
    43.45
    
    
    
    
    46.15
    
    
    
    
    27,921
    
    
    
    
    14,554,520June
    
    
    
    46.01
    
    
    
    
    46.49
    
    
    
    
    41.46
    
    
    
    
    42.39
    
    
    
    
    32,616
    
    
    
    
    19,606,925July
    
    
    
    43.29
    
    
    
    
    48.12
    
    
    
    
    41.79
    
    
    
    
    47.50
    
    
    
    
    30,485
    
    
    
    
    13,214,295August
    
    
    
    47.50
    
    
    
    
    47.95
    
    
    
    
    44.82
    
    
    
    
    44.82
    
    
    
    
    28,758
    
    
    
    
    13,780,242September
    
    
    
    44.80
    
    
    
    
    50.49
    
    
    
    
    44.46
    
    
    
    
    50.04
    
    
    
    
    34,531
    
    
    
    
    13,238,456October
    
    
    
    50.04
    
    
    
    
    51.50
    
    
    
    
    46.60
    
    
    
    
    48.55
    
    
    
    
    37,440
    
    
    
    
    14,744,250November
    
    
    
    48.79
    
    
    
    
    50.38
    
    
    
    
    46.70
    
    
    
    
    50.25
    
    
    
    
    36,103
    
    
    
    
    18,231,934December
    
    
    
    51.10
    
    
    
    
    52.70
    
    
    
    
    47.00
    
    
    
    
    48.71
    
    
    
    
    51,300
    
    
    
    
    16,928,700
  Opening
    
    
    
    High
    
    
    
    Low
    
    
    
    Closing
    
    
    
    Number of
    
    
    
    Volume ofPrice per
    
    
    
    Price per
    
    
    
    Price per
    
    
    
    Price per
    
    
    
    Trades
    
    
    
    SharesMonth
    
    
    Share ($)
    
    
    
    Share ($)
    
    
    
    Share ($)
    
    
    
    Share ($)
    
    
    
    Performed
    
    
    
    TradedJanuary
    
    
    
    34.50
    
    
    
    
    34.81
    
    
    
    
    31.52
    
    
    
    
    33.68
    
    
    
    
    14,116
    
    
    
    
    6,571,300February
    
    
    
    33.63
    
    
    
    
    35.80
    
    
    
    
    33.20
    
    
    
    
    35.47
    
    
    
    
    8,594
    
    
    
    
    3,031,700March
    
    
    
    35.40
    
    
    
    
    38.05
    
    
    
    
    34.33
    
    
    
    
    35.97
    
    
    
    
    11,364
    
    
    
    
    3,855,700April
    
    
    
    36.06
    
    
    
    
    37.85
    
    
    
    
    33.75
    
    
    
    
    34.92
    
    
    
    
    17,896
    
    
    
    
    7,835,600May
    
    
    
    35.00
    
    
    
    
    37.33
    
    
    
    
    34.25
    
    
    
    
    36.95
    
    
    
    
    11,639
    
    
    
    
    3,775,900June
    
    
    
    37.01
    
    
    
    
    37.24
    
    
    
    
    33.60
    
    
    
    
    34.51
    
    
    
    
    15,167
    
    
    
    
    4,979,100July
    
    
    
    34.51
    
    
    
    
    39.26
    
    
    
    
    33.71
    
    
    
    
    38.84
    
    
    
    
    14,878
    
    
    
    
    5,303,200August
    
    
    
    38.84
    
    
    
    
    39.92
    
    
    
    
    37.36
    
    
    
    
    37.83
    
    
    
    
    14,038
    
    
    
    
    3,848,100September
    
    
    
    37.73
    
    
    
    
    43.30
    
    
    
    
    37.40
    
    
    
    
    42.96
    
    
    
    
    16,082
    
    
    
    
    4,425,400October
    
    
    
    42.97
    
    
    
    
    43.87
    
    
    
    
    39.78
    
    
    
    
    41.27
    
    
    
    
    19,997
    
    
    
    
    5,486,400November
    
    
    
    41.27
    
    
    
    
    43.15
    
    
    
    
    39.56
    
    
    
    
    43.14
    
    
    
    
    22,187
    
    
    
    
    6,766,300December
    
    
    
    43.80
    
    
    
    
    45.34
    
    
    
    
    40.77
    
    
    
    
    41.95
    
    
    
    
    25,427
    
    
    
    
    7,753,400
  Shareholder@cpr.ca
 27




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##### 



MARKET FOR SECURITIES
 
  28




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##### 



DIRECTORS AND OFFICERS
 
  
 Directors
 Year of annual meetingPositions held and principal occupations within
    
    at which term of officeName and municipality of residence
    
    the preceding five years(1)
    

expires (director 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)
    
    
    2006(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)
    
    
    2006(2001)T.W. Faithfull (3)(4)(5)
Oxford, Oxfordshire, England
    
    Retired President and Chief Executive Officer Shell Canada Limited (oil and gas company)
    
    
    2006(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)
    
    
    2006(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)
    
    
    2006(2001)M. Paquin
(2)(3)(4)
Montreal, Quebec, Canada
    
    President and Chief Executive
Officer, Logistec Corporation (international cargo-handling company)
    
    
    2006(2001)M.E.J.
Phelps, O.C.
(3)(4)(5)(6)
West Vancouver, B.C., Canada
    
    Chairman, Dornoch Capital Inc. (private investment company)
    
    
    2006(2001)R. Phillips, O.C.
(2)(3)(6)
Regina, Saskatchewan, Canada
    
    Retired President and Chief
Executive Officer, IPSCO Inc. (steel manufacturing company)
    
    
    2006(2001)R.J. Ritchie
Calgary, Alberta, Canada
    
    Chief Executive Officer, Canadian
Pacific Railway Limited
    
    
    2006(2001)M.W. Wright
(2)(3)(5)
Longboat Key, Florida, U.S.A.
    
    Retired Chairman of the Board and
Chief Executive Officer, SUPERVALU INC. (food distributor and grocery retailer)
    
    
    2006(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 to 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 to March 2002. R. Phillips was President and Chief
Executive Officer of IPSCO Inc. from February 1982 to December 2001. R.J Ritchie was
President and Chief Executive Officer of Canadian Pacific Railway Company from July 1996 until
his appointment as Chief Executive Officer in November 2005, and was President and Chief
Executive Officer of Canadian Pacific Railway Limited from October 2001 to November 2005.
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.
 29




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##### 



DIRECTORS AND OFFICERS
 
 
 Cease Trade Orders
  
 Senior Officers
  Principal occupations 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
    
    Chief Executive
Officer
    
    Chief Executive Officer,
Canadian Pacific Railway
Company; President and Chief
Executive Officer, Canadian
Pacific Railway Company and
Canadian Pacific Railway
LimitedF.J. Green
Calgary, Alberta, Canada
    
    President and Chief
Operating Officer
    
    President and Chief Operating
Officer, Canadian Pacific
Railway Company; Executive
Vice-President and Chief
Operating Officer, Canadian
Pacific Railway Company and
Canadian Pacific Railway
Limited; Executive
Vice-President, Marketing and
Operations, Canadian Pacific
Railway Company; Senior
Vice-President, Marketing,
Canadian Pacific Railway
Company; Vice-President,
Marketing, Canadian Pacific
Railway CompanyM.T. Waites
Municipal District of Rocky View,
Alberta, 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
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 (1)
Municipal District of Rocky View,
Alberta, 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)
 30




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##### 



DIRECTORS AND OFFICERS
 
 Principal occupations within theName and municipality of residence
    
    Position held
    
    preceding five yearsB.W. 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.
(provider of technologies for
civil aviation and military
use)P.A. Guthrie, Q.C.
Municipal District of Rocky View,
Alberta, 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 CompanyT.A. Robinson (1)
Calgary, Alberta, Canada
    
    Assistant Treasurer
    
    Assistant Treasurer, Canadian
Pacific Railway Limited and
Canadian Pacific Railway
Company; Assistant Comptroller,
Canadian Pacific Railway
Company; Assistant
Vice-President, Customer
Service, Canadian Pacific
Railway Company; General
Manager, Operations, Canadian
Pacific Railway CompanyD.F. Barnhardt
Calgary, Alberta, Canada
    
    Corporate Secretary
    
    Corporate Secretary, Canadian
Pacific Railway Company;
Lawyer/Commercial Coordinator,
Canadian Pacific Railway
CompanyG.A. Feigel
Calgary, Alberta, Canada
    
    Assistant Corporate
Secretary
    
    Assistant Corporate Secretary,
Canadian Pacific Railway
Company; Assistant Corporate
Secretary, Canadian Pacific
Limited
 (1)
    T.A. Robinson replaced J.J. Doolan as Vice-President and Treasurer,
effective January 1, 2006. 
 Shareholdings of Directors and Officers
  Announcements
   31




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##### 



LEGAL PROCEEDINGS
 
  Stoney Tribal Council v. Canada, EnCana and CPR
   Derailment
 Minot, North Dakota
      32




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##### 



TRANSFER AGENTS AND REGISTRARS
 
 
 Transfer Agent
   th
 33




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##### 



INTERESTS OF EXPERTS
 
  34




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##### 



OUR AUDIT, FINANCIAL AND RISK MANAGEMENT COMMITTEE
 
 
 Composition of the Audit, Financial and Risk Management Committee and Relevant Education and
Experience
  Stephen E. Bachand
 John
E. Cleghorn
 Madeleine Paquin
 Roger Phillips (Chair)
 Michael W. Wright
  
 Pre-Approval of Policies and Procedures
  35




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##### 



OUR AUDIT, FINANCIAL AND RISK MANAGEMENT COMMITTEE
 
 Audit, Finance and Risk Management Committee Charter
  A.
    
    Committee and Procedures1.
    
    Purposes
 The purposes of the Audit, Finance and Risk Management Committee (the Committee) of the Board
of Directors of the Company are to fulfill applicable public company audit committee legal
obligations and to assist the Board of Directors in fulfilling its oversight responsibilities
in relation to the disclosure of financial statements and information derived from financial
statements, and in relation to risk management matters, including:
 
    
    the review of the annual and interim financial statements of the
Company;
    
    the integrity and quality of the Companys financial reporting and
systems of internal control, and risk management;
    
    the Companys compliance with legal and regulatory requirements;
    
    the qualifications, independence, engagement, compensation and
performance of the Companys external auditors; and
    
    the performance of the Companys internal audit function.
 The Committee also prepares, if required, an audit committee report for inclusion in the
Companys annual management proxy circular, in accordance with applicable rules and
regulations.The Companys external auditors shall report directly to the Committee.
 2.
    
    Composition of Committee
 The members of the Committee of each of CPRL and CPRC shall be identical and shall be directors
of CPRL and CPRC, respectively. The Committee shall consist of not less than three and not
more than six directors, none of whom is either an officer or employee of the Company or any of
its subsidiaries. Members of the Committee shall meet applicable requirements and guidelines
for audit committee service, including requirements and guidelines with respect to being
independent and unrelated to the Company and to having accounting or related financial
management expertise and financial literacy, set forth in applicable securities laws or the
rules of any stock exchange on which the Companys securities are listed for trading. No
director who serves on the audit committee of more than two public companies other than the
Company shall be eligible to serve as a member of the Committee, unless the Board of Directors
has determined that such simultaneous service would not impair the ability of such member to
effectively serve on the Committee. Determinations as to whether a particular director
satisfies the requirements for membership on the Committee shall be affirmatively made by the
full Board.
 3.
    
    Appointment of Committee Members
 Members of the Committee shall be appointed from time to time by the Board and shall hold
office at the pleasure of the Board. Where a vacancy occurs at any time in the membership of
the Committee, it may be filled by the Board. The Board shall fill a vacancy whenever
necessary to maintain a Committee membership of at least three directors.
 4.
    
    Committee Chair
 The Board shall appoint a Chair for the Committee from among the Committee members.
 5.
    
    Absence of Committee Chair
 If the Chair of the Committee is not present at any meeting of the Committee, one of the other
members of the Committee who is present at the meeting shall be chosen by the Committee to
preside at the meeting.
 6.
    
    Secretary of Committee
 The Committee shall appoint a Secretary who need not be a director of the Company.
 7.
    
    Meetings
 The Committee shall have regularly scheduled meetings at least once every quarter and shall
meet at such other times during each year, as it deems appropriate. In addition, the Chair of
the Committee may call a special meeting of the Committee at any time.
 36




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##### 



OUR AUDIT, FINANCIAL AND RISK MANAGEMENT COMMITTEE
 
 8.
    
    Quorum
 Three members of the Committee shall constitute a quorum.
 9.
    
    Notice of Meetings
 Notice of the time and place of every meeting shall be given in writing by any means of
transmitted or recorded communication, including facsimile, telex, telegram or other electronic
means that produces a written copy, to each member of the Committee at least 24 hours prior to
the time fixed for such meeting. However, a member may in any manner waive a notice of a
meeting. Attendance of a member at a meeting constitutes a waiver of notice of the meeting,
except where a member attends a meeting for the express purpose of objecting to the transaction
of any business on the grounds that the meeting is not lawfully called.
 10.
    
    Attendance of Others at Meetings
 At the invitation of the Chair of the Committee, other individuals who are not members of the
Committee may attend any meeting of the Committee.
 11.
    
    Procedure, Records and Reporting
 Subject to any statute or the articles and by-laws of the Company, the Committee shall fix its
own procedures at meetings, keep records of its proceedings and report to the Board when the
Committee may deem appropriate (but not later than the next meeting of the Board). The minutes
of its meetings shall be tabled at the next meeting of the Board.
 12.
    
    Delegation
 The Committee may delegate from time to time to any person or committee of persons any of the
Committees responsibilities that lawfully may be delegated.
 13.
    
    Report to Shareholders
 The Committee shall prepare a report to shareholders or others concerning the Committees
activities in the discharge of its responsibilities, when and as required by applicable laws or
regulations.
 14.
    
    Guidelines to Exercise of Responsibilities
 The Board recognizes that meeting the responsibilities of the Committee in a dynamic business
environment requires a degree of flexibility. Accordingly, the procedures outlined in these
terms of reference are meant to serve as guidelines rather than inflexible rules, and the
Committee may adopt such different or additional procedures as it deems necessary from time to
time.
 15.
    
    Use of Outside Legal, Accounting or Other Advisors; Appropriate Funding
 The Committee may retain, at its discretion, outside legal, accounting or other advisors at the
expense of the Company to obtain advice and assistance in respect of any matters relating to
its duties, responsibilities and powers, as provided for or imposed by these terms of reference
or otherwise by law.The Company shall provide the Committee with appropriate funding, as determined by the
Committee, for payment of:
 (i)
    
    compensation of any outside advisors, as contemplated by the immediately
preceding paragraph;(ii)
    
    compensation of any independent auditor engaged for the purpose of preparing or
issuing an audit report or performing other audit, review or attest services for the
Company; or(iii)
    
    ordinary administrative expenses that are necessary or appropriate in carrying
out the Committees duties.
 All outside legal, accounting or other advisors retained to assist the Committee shall be
accountable ultimately to the Committee.
 16.
    
    Remuneration of Committee Members
 No member of the Committee shall receive from the Company or any of its affiliates any
compensation other than the fees to which he or she is entitled as a director of the Company or
a member of a committee of the Board. Such fees may be paid in cash and/or shares, options or
other in-kind consideration ordinarily available to directors.
 B.
    
    Mandate
 17.
    
    The Committees role is one of oversight. Management is responsible for; preparing the
interim and annual financial statements of the Company; maintaining a system of risk
assessment and internal controls to provide reasonable assurance
 37




---



##### 



OUR AUDIT, FINANCIAL AND RISK MANAGEMENT COMMITTEE
 
 that assets are safeguarded
and that transactions are authorized, recorded and reported properly; maintaining disclosure
controls and procedures to ensure that it is informed on a timely basis of material
developments and the Company complies with its public disclosure obligations; and ensuring
compliance by the Company with legal and regulatory requirements. The external auditors are
responsible for auditing the Companys financial statements. In carrying out its oversight
responsibilities, the Committee does not provide any professional certification or special
assurance as to the Companys financial statements or the external auditors work.The Committee shall:Audit MattersExternal Auditors Report on Annual Audit
 a)
    
    obtain and review annually, prior to the completion of the external auditors annual
audit of the year-end financial statements, a report from the external auditors
describing:
 (i)
    
    all critical accounting policies and practices to be used;(ii)
    
    all alternative treatments of financial information within generally
accepted accounting principles that have been discussed with management, the
ramifications of the use of such alternative disclosures and treatments, and the
treatment preferred by the external auditors; and(iii)
    
    other material written communications between the external auditors and
management, such as any management letter or schedule of unadjusted differences;
 Managements and Internal Auditors Reports on External Audit Issues
 b)
    
    review any reports on the above or similar topics prepared by management or the
internal auditors and discuss with the external auditors any material issues raised in
such reports;
 Annual Financial Reporting Documents and External Auditors Report
 c)
    
    meet to review with management and the external auditors the Companys annual
financial statements, the report of the external auditors thereon, the related
Managements Discussion and Analysis, and the information derived from the financial
statements, as contained in the Annual Information Form and the Annual Report. Such
review will include obtaining assurance from the external auditors that the audit was
conducted in a manner consistent with applicable law and will include a review of:
 (i)
    
    all major issues regarding accounting principles and financial statement
presentations, including any significant changes in the Companys selection or
application of accounting policies or principles;(ii)
    
    all significant financial reporting issues and judgments made in
connection with the preparation of the financial statements, including the effect on
the financial statements of alternative methods within generally accepted accounting
principles;(iii)
    
    the effect of regulatory and accounting issues as well as off-balance
sheet structures on the financial statements;(iv)
    
    all major issues as to the adequacy of the Companys internal controls
and any special steps adopted in light of material control deficiencies; and(v)
    
    the external auditors judgment about the quality, and not just the
acceptability, of the accounting principles applied in the Companys financial
reporting;
 d)
    
    following such review with management and the external auditors, recommend to the
Board of Directors whether to approve the audited annual financial statements of the
Company and the related Managements Discussion and
Analysis, and report to the Board on the review by the Committee of the information derived
from the financial statements contained in the Annual Information Form and Annual Report;
 Interim Financial Statements and MD&A
 e)
    
    review with management and the external auditors the Companys interim financial
statements and its interim Managements Discussion and Analysis, and if thought fit,
approve the interim financial statements and interim Managements Discussion and Analysis
and the public release thereof by management;
 38




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##### 



OUR AUDIT, FINANCIAL AND RISK MANAGEMENT COMMITTEE
 
 Earnings Releases and Earnings Guidance
 f)
    
    review and discuss earnings press releases, including the use of pro forma or
adjusted information determined other than in accordance with generally accepted
accounting principles, and the disclosure by the Company of earnings guidance and other
financial information to the public, including analysts and rating agencies, it being
understood that such discussions may, in the discretion of the Committee, be done
generally (i.e. by discussing the types of information to be disclosed and the type of
presentation to be made) and that the Committee need not discuss in advance each earnings
release or each instance in which the Company discloses earnings guidance or other
financial information; and be satisfied that adequate procedures are in place for the
review of such public disclosures and periodically assess the adequacy of those
procedures;
 Material Litigation, Tax Assessments, Etc.
 g)
    
    review with management, the external auditors and, if necessary, legal counsel all
legal and regulatory matters and litigation, claims or contingencies, including tax
assessments, that could have a material effect upon the financial position of the Company,
and the manner in which these matters may be, or have been, disclosed in the financial
statements; and obtain reports from management and review with the Companys chief legal
officer, or appropriate delegates, the Companys compliance with legal and regulatory
requirements;
 Oversight of External Auditors
 h)
    
    subject to applicable law relating to the appointment and removal of the external
auditors, be directly responsible for the appointment, retention, termination,
compensation and oversight of the external auditors; and be responsible for the resolution
of disagreements between management and the external auditors regarding financial
reporting;
 Rotation of External Auditors Audit Partners
 i)
    
    review and evaluate the lead audit partner of the external auditors and assure the
regular rotation of the lead audit partner and the audit partner responsible for reviewing
the audit and other audit partners, as required by applicable law; and consider whether
there should be a regular rotation of the external audit firm itself;
 External Auditors Internal Quality Control
 j)
    
    obtain and review, at least annually, and discuss with the external auditors a report
by the external auditors describing the external auditors internal quality-control
procedures, any material issues raised by the most recent internal quality-control review
or peer review of the external auditors, or by any inquiry or investigation by
governmental or professional authorities, within the preceding five years, respecting one
or more independent audits carried out by the external auditors, and any steps taken to
deal with any such issues;
 External Auditors Independence
 k)
    
    review and discuss at least annually with the external auditors all relationships
that the external auditors and their affiliates have with the Company and its affiliates
in order to assess the external auditors independence, including, without limitation:
 (i)
    
    obtaining and reviewing at least annually a formal written statement from
the external auditors delineating all relationships that in the external auditors
professional judgment may reasonably be thought to bear on the independence of the
external auditors with respect to the Company,(ii)
    
    discussing with the external auditors any disclosed relationships or
services that may affect the objectivity and independence of the external auditors,
and(iii)
    
    recommending that the Board take appropriate action in response to the
external auditors report to satisfy itself as to the external auditors
independence;
 Policies Regarding Hiring of External Auditors Employees and Former Employees
 l)
    
    set clear policies for the hiring by the Company of partners, employees and former
partners and employees of the external auditors;
 Pre-Approval of Audit and Non-Audit Services Provided by External Auditors
 m)
    
    be solely responsible for the pre-approval of all audit and non-audit services to be
provided to the Company and its subsidiary entities by the external auditors (subject to
any prohibitions provided in applicable law), and of the fees paid for these services;
provided however, that the Committee may delegate to an independent member or members of
 39




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##### 



OUR AUDIT, FINANCIAL AND RISK MANAGEMENT COMMITTEE
 
 the Committee authority to pre-approve such non-audit services, and such member(s) shall
report to the Committee at its next meeting following the granting of any pre-approvals
pursuant to such delegated authority;
 Oversight of Internal Audit
 n)
    
    oversee the internal audit function by reviewing senior management action with
respect to the appointment or dismissal of the Director of Internal Audit; afford the
Director of Internal Audit unrestricted access to the Committee; review the charter,
activities, organizational structure, and the skills and experience of the Internal Audit
Department; discuss with management and the external auditors the competence, performance
and cooperation of the internal auditors; and discuss with management the compensation of
the internal auditors;o)
    
    review and consider, as appropriate, any significant reports and recommendations
issued by the Company or by any external party relating to internal audit issues, together
with managements response thereto;
 Internal Controls and Financial Reporting Processes
 p)
    
    review with management, the internal auditors and the external auditors, the
Companys financial reporting processes and its internal controls;q)
    
    review with the internal auditors the adequacy of internal controls and procedures
related to any corporate transactions in which directors or officers of the Company have a
personal interest, including the expense accounts of officers of the Company at the level
of Vice-President and above and officers use of corporate assets, and consider the
results of any reviews thereof by the internal or external auditors;
 Complaints Processes
 r)
    
    establish procedures for:
 (i)
    
    the receipt, retention and treatment of complaints received by the
Company regarding accounting, internal accounting controls or auditing matters, and(ii)
    
    the confidential, anonymous submission by employees of the Company of
concerns regarding questionable accounting or auditing matters,
 and review periodically with management and the internal auditors these procedures and any
significant complaints received;
 Separate Meetings with External Auditors, Internal Audit, Management
 s)
    
    meet separately and periodically with management, the external auditors and the
internal auditors to discuss matters of mutual interest, including any audit problems or
difficulties and managements response thereto, the responsibilities, budget and staffing
of the Internal Audit Department and any matter they recommend bringing to the attention
of the full Board;
 Finance
 t)
    
    review all major financings, including financial statement information contained in
related prospectuses, information circulars, etc., of the Company and its subsidiaries and
annually review the Companys financing plans and strategies;u)
    
    review managements plans with respect to Treasury operations, including such items
as financial derivatives and hedging activities;
 Risk Management
 v)
    
    discuss risk assessment and risk management policies and processes to be implemented
for the Company, review with management and the Companys internal and external auditors
the effectiveness and efficiency of such policies and processes and their compliance with
other relevant policies of the Company, and make recommendations to the Board with respect
to any outcomes, findings and issues arising in connection therewith;w)
    
    review managements program to obtain appropriate insurance to mitigate risks;
 Terms of Reference and Performance Evaluation of Committee
 x)
    
    review and reassess the adequacy of these terms of reference at least annually and
otherwise, as it deems appropriate, and recommend changes to the Board, and undertake an
annual evaluation of the Committees performance;
 40




---



##### 



OUR AUDIT, FINANCIAL AND RISK MANAGEMENT COMMITTEE
 
 Other
 y)
    
    perform such other activities, consistent with these terms of reference, the
Companys articles and by-laws, and governing law, as the Committee or the Board deems
appropriate; andz)
    
    report regularly to the Board of Directors on the activities of the Committee.
 
 Audit and Non-Audit Fees and Services
  Year ended
    
    Year endedDecember 31, 2005
    
    December 31, 2004Audit Fees
    
    $
    1,086,000
    
    
    $
    1,005,000Audit-Related Fees
    
    $
    812,540
    
    
    $
    574,900Tax Fees
    
    $
    243,600
    
    
    $
    318,100All Other Fees
    
    $
    0
    
    
    $
    0TOTAL
    
    $
    2,142,140
    
    
    $
    1,898,000
  Audit Fees
  Audit-Related Fees
 Sarbanes Oxley Act of 2002
 Tax Fees
  All Other Fees
  41




---



##### 



ADDITIONAL INFORMATION
 
 
 Additional Company Information
 www.cpr.ca www.sedar.com www.sec.gov/edgar
   42




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##### 








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##### 



ANNUAL 20REPORT 05 EXECUTION excellence




---



##### 



COVERWestbound and eastbound CPR trains pass west of Kamloops, British Columbia, in CPRs western corridor where we installed almost 27,000 feet of new track in 2005. The work was part of a $160-million expansion of track capacity on our busy corridor between the Canadian prairies and the Vancouver Gateway. Double track, new sidings, siding extensions, improved signal systems and high-speed track-to-track crossovers were built. CPR now has capacity for an additional 1,500 trains a year. Demand for rail service is growing and our franchise, serving large consumer markets and resource production areas, is ideally positioned to capture this growth. North American retailers are increasingly sourcing consumer products from Asia-Pacific countries. Canadian resources are in high demand, particularly in China, where economic expansion is fueling the countrys appetite for coal from the British Columbia interior, and grain and potash from the prairies. CANADIAN PACIFIC RAILWAYs14,000-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.




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##### 



With the biggest capacity expansion in two decades behind us, CPR is focused squarely on maximizing the benefits of this new infrastructure. Employees in all functions, at all levels are engaged in execution excellence. This will translate into increased fluidity. CPR will leverage fluidity to improve service to support continued price strengthening and modal share growth, contain expenses as business grows and create additional capacity without the need to spend more capital. THREE PILLARS OF SHAREHOLDER VALUE Quality Revenue Growth CPR is achieving growth in all of our business groups  bulk commodities, containerized intermodal traffic, and merchandise freight. Investments in track infrastructure, freight cars and information technology have been aligned with our customers growth, shifts in global trade patterns and opportunities to increase price and improve yield. Improved Productivity Execution excellence is the way forward as CPR targets higher productivity. We will leverage simplified marketing programs and technology investments in our yards and terminals. Scheduled operations and cooperative arrangements with other railways will increase fluidity. This will drive up volume and yield and maximize the value of our investments while reducing operating expenses.




---



##### 



GLOBAL TRADE IS SHIFTING IN A WAY THAT FAVOURS RAILWAYS. DEMAND FOR RAIL TRANSPORTATION IS EXCEEDING SUPPLY IN MANY AREAS. THE RAIL INDUSTRY IS UNDERGOING SECULAR  NOT CYCLICAL 
CHANGE AND THE FUNDAMENTALS APPEAR STRONG TO SUSTAIN OUR POSITIVE BUSINESS CLIMATE. FRED GREENPresident DELIVERshareholder value
2005 HIGHLIGHTS
In 2005, CPR met and exceeded its commitments to shareholders.
Earnings per share Return on Western corridor$3.39, up 30 %capital employed capacity expansion
9.4 %, up from 7.3 %completed on time,
Revenuesafely, within budget $4.392 billion, up 13 %Free cash flow (after dividends)$92 million 01 Chairmans 2005 Letter to Shareholders
02 CEOs 2005
Letter to Shareholders
04 Business Profile and Strategy
05 Highlights Summary
06 Operating Results
08 Non-GAAP Earnings
11 Lines of Business
17 Performance Indicators Operating Expenses, Before Other Specified Items Other Income Statement Items Fourth-quarter Summary Quarterly Financial Data Changes in Accounting Policy Liquidity and Capital Resources Balance
Sheet 31 Financial
Instruments 45 Glossary of Terms
33Off-balance Sheet 47 Managements Responsibility Arrangements for Financial Reporting
34 Contractual Commitments 48 Auditors Report
35 Future Trends, 49 Consolidated Financial Commitments and Risks Statements
40 Critical Accounting 53 Notes to Consolidated Estimates Financial Statements
43 Systems, Procedures 91 Five-year Summary and Controls 92 Shareholder Information
44 Forward-looking Information




---



##### 



(PHOTO OF J. E. NEWALL)
    

-s- J. E. NewallJ.E. NEWALL
Chairman of the Board
 01




---



##### 



02




---



##### 



(PHOTO OF ROBERT J. RITCHIE)
    

-s- Robert J. Ritchie
 03




---



##### 



Business Profile
  Strategy
  
    
    generating quality revenue
growth by realizing the benefits
of demand growth in our bulk,
intermodal and merchandise
business lines with targeted
infrastructure capacity
investments linked to global trade
opportunities;
    
    improving productivity by
leveraging strategic marketing and
operating partnerships, executing
a scheduled railway (our
Integrated Operating Plan), and
driving more value from existing
assets and resources (improving
fluidity); and
    
    continuing to develop a
dedicated, professional and
knowledgeable workforce that is
committed to safety and
sustainable financial
performance through steady
improvement in profitability,
increased free cash flow and a
competitive return on
investment.
 Additional Information
  04




---



##### 



2005
    
    
    2004
    
    
    2003Revenues
    
    $
    4,391.6
    
    
    $
    3,902.9
    
    
    $
    3,660.7Operating expenses
    
    
    3,390.2
    
    
    
    3,114.4
    
    
    
    2,931.1Operating income, before the following:
    
    
    1,001.4
    
    
    
    788.5
    
    
    
    729.6Special charge for (reduction to) labour restructuring and asset impairment
    
    
    44.2
    
    
    
    (19.0
    )
    
    
    215.1Special charge for (reduction to) environmental remediation
    
    
    (33.9
    )
    
    
    90.9
    
    
    
    Loss on transfer of assets to outsourcing firm
    
    
    
    
    
    
    
    
    
    
    28.9Operating income
    
    
    991.1
    
    
    
    716.6
    
    
    
    485.6Other charges
    
    
    18.1
    
    
    
    36.1
    
    
    
    33.5Foreign exchange gains on long-term debt (FX on LTD)
    
    
    (44.7
    )
    
    
    (94.4
    )
    
    
    (209.5
    )Interest expense
    
    
    204.2
    
    
    
    218.6
    
    
    
    218.7Income tax expense
    
    
    270.6
    
    
    
    143.3
    
    
    
    41.6Net income
    
    $
    542.9
    
    
    $
    413.0
    
    
    $
    401.3Basic earnings per share
    
    $
    3.43
    
    
    $
    2.60
    
    
    $
    2.53Diluted earnings per share
    
    $
    3.39
    
    
    $
    2.60
    
    
    $
    2.52Total assets
    
    $
    10,891.1
    
    
    $
    10,499.8
    
    
    $
    9,956.7Total long-term financial liabilities
    
    $
    5,388.7
    
    
    $
    5,229.2
    
    
    $
    5,347.5Dividends declared (per share)
    
    $
    0.5825
    
    
    $
    0.5200
    
    
    $
    0.5100
 05




---



##### 



Income
  
    
    higher revenues resulting from
increased freight rates and
volumes;
    
    a $90.9-million special charge
taken in the fourth quarter of
2004 for environmental clean-up
costs (discussed further in this
MD&A under the sub-heading Other
Specified Items in the section
Non-GAAP Earnings), compared
with 2005 when there were no such
special charges;
    
    a reduction of $33.9 million
(discussed further in this MD&A
under the sub-heading Other
Specified Items) in the third
quarter of 2005 to the special
charge for environmental clean-up
costs; and
    
    revenue of approximately
$23 million recorded in the first
half of 2005, relating to prior
years, as a result of an agreement
reached with Elk Valley Coal
Partnership (EVC) (discussed
further in this MD&A under the
sub-heading Coal in the
sub-section Revenues).
  
    
    higher costs for compensation
and benefits, and depreciation and
amortization (discussed further in
this MD&A under the heading
Operating Expenses, Before Other
Specified Items);
    
    a special charge of $44.2
million taken in the fourth
quarter of 2005 for a new
restructuring initiative to
reduce administrative costs
(discussed further in this MD&A
under the sub-heading Other
Specified Items);
    
    a reduction of $19.0 million
taken in 2004 related to the
restructuring portion of a special
charge taken in 2003 for
restructuring and asset impairment
(the reduction and special charge
are discussed further in this MD&A
under the sub-heading Other
Specified Items), compared with
2005 when no such reductions
occurred;
    
    the net effect of Foreign
Exchange on U.S.
dollar-denominated revenues and
expenses; and
    
    the impact of inflation on expenses.
    
    
    higher revenues resulting from
increased freight volumes and
rates;
    
    a special charge of $215.1
million for restructuring and
asset impairment taken in the
second quarter of 2003, compared
with 2004 when there were no such
charges;
    
    a loss of $28.9 million on the
transfer of assets to IBM Canada
Ltd. (IBM) taken in the fourth
quarter of 2003 (discussed further
in this MD&A under the sub-heading
Other Specified Items), compared
with 2004 when there were no such
losses; and
    
    the $19.0-million reduction
taken in 2004 related to the
special charge taken in the
second quarter of 2003 for
restructuring and asset
impairment.
  
    
    higher costs in 2004 for
compensation and benefits, fuel,
depreciation and amortization, and
purchased services and other
expenses (discussed further in this
MD&A in the section Operating
Expenses, Before Other Specified
Items);
    
    the reduction to 2004 earnings
resulting from the special charge
for environmental clean-up costs;
and
    
    the net effect of the change in
Foreign Exchange on U.S.
dollar-denominated revenues and
expenses.
   06




---



##### 



Diluted Earnings per Share
  Operating Ratio
  Effect of Foreign
Exchange on Earnings
   07




---



##### 



Favourable
(Unfavourable) Effect on Earnings Due to the Change in Foreign Exchange
 For the year ended December 31 (in millions, except foreign exchange rate) (unaudited)
    
    2005
    
    
    2004
    (1)Average annual foreign exchange rate
    
    $
    1.21
    
    
    $
    1.30Freight revenuesGrain
    
    $
    (23
    )
    
    $
    (25
    )Coal
    
    
    (8
    )
    
    
    (8
    )Sulphur and fertilizers
    
    
    (11
    )
    
    
    (14
    )Forest products
    
    
    (16
    )
    
    
    (17
    )Industrial and consumer products
    
    
    (25
    )
    
    
    (25
    )Automotive
    
    
    (14
    )
    
    
    (16
    )Intermodal
    
    
    (21
    )
    
    
    (22
    )Other revenues
    
    
    (2
    )
    
    
    (3
    )Total revenues
    
    
    (120
    )
    
    
    (130
    )Operating expenses, before other specified items (2)Compensation and benefits
    
    
    23
    
    
    
    28Fuel
    
    
    23
    
    
    
    24Materials
    
    
    3
    
    
    
    3Equipment rents
    
    
    13
    
    
    
    16Depreciation and amortization
    
    
    5
    
    
    
    5Purchased services and other
    
    
    18
    
    
    
    23Total operating expenses, before other specified items (2)
    
    
    85
    
    
    
    99Operating income, before other specified items (2)
    
    
    (35
    )
    
    
    (31
    )Other expensesOther charges
    
    
    1
    
    
    
    3Interest expense
    
    
    12
    
    
    
    13Income tax expense, before FX on LTD and other specified items (2)
    
    
    6
    
    
    
    3Income, before FX on LTD and other specified items (2)
    
    $
    (16
    )
    
    $
    (12
    )
 (1)
    
    Certain prior period figures have been reclassified to conform with presentation
adopted in 2005.(2)
    
    These earnings measures have no standardized meanings prescribed by Canadian GAAP
and, therefore, are unlikely to be comparable to similar measures of other companies. These
earnings measures and other specified items are described in the Non-GAAP Earnings section of
this MD&A.
    08




---



##### 



Summarized Statement of Consolidated Income
  For the year ended
    
    
    For the three months endedDecember 31
    
    
    December 31(in millions) (unaudited)
    
    2005
    
    
    2004
    
    
    2003
    
    
    2005
    
    
    2004Revenues
    
    $
    4,391.6
    
    
    $
    3,902.9
    
    
    $
    3,660.7
    
    
    $
    1,166.9
    
    
    $
    1,021.9Operating expenses, before other specified items(1)
    
    
    3,390.2
    
    
    
    3,114.4
    
    
    
    2,931.1
    
    
    
    864.7
    
    
    
    788.9Operating income, before other specified items(1)
    
    
    1,001.4
    
    
    
    788.5
    
    
    
    729.6
    
    
    
    302.2
    
    
    
    233.0Other charges
    
    
    18.1
    
    
    
    36.1
    
    
    
    33.5
    
    
    
    6.8
    
    
    
    12.9Interest expense
    
    
    204.2
    
    
    
    218.6
    
    
    
    218.7
    
    
    
    49.1
    
    
    
    52.6Income tax expense, before income tax on FX on LTD
and other specified items (1)
    
    
    250.8
    
    
    
    172.4
    
    
    
    147.3
    
    
    
    77.5
    
    
    
    51.2Income, before FX on LTD and other specified items(1)
    
    
    528.3
    
    
    
    361.4
    
    
    
    330.1
    
    
    
    168.8
    
    
    
    116.3Foreign exchange (gains) losses on long-term debtFX on LTD  (gains) losses
    
    
    (44.7
    )
    
    
    (94.4
    )
    
    
    (209.5
    )
    
    
    0.6
    
    
    
    (57.2
    )Income tax on FX on LTD
    
    
    22.4
    
    
    
    
    
    
    
    (14.9
    )
    
    
    4.5
    
    
    
    1.4FX on LTD (net of tax)
    
    
    (22.3
    )
    
    
    (94.4
    )
    
    
    (224.4
    )
    
    
    5.1
    
    
    
    (55.8
    )Other specified items(1)Special charge for (reduction to) labour restructuring
and asset impairment
    
    
    44.2
    
    
    
    (19.0
    )
    
    
    215.1
    
    
    
    44.2
    
    
    
    (19.0
    )Special charge for (reduction to) environmental remediation
    
    
    (33.9
    )
    
    
    90.9
    
    
    
    
    
    
    
    
    
    
    
    90.9Loss on transfer of assets to outsourcing firm
    
    
    
    
    
    
    
    
    
    
    28.9
    
    
    
    
    
    
    
    Income tax on other specified items
    
    
    (2.6
    )
    
    
    (29.1
    )
    
    
    (84.2
    )
    
    
    (15.9
    )
    
    
    (29.1
    )Special charges and loss on transfer
of assets (net of tax)
    
    
    7.7
    
    
    
    42.8
    
    
    
    159.8
    
    
    
    28.3
    
    
    
    42.8Revaluation of future income taxes
    
    
    
    
    
    
    
    
    
    
    (59.3
    )
    
    
    
    
    
    
    Effect of increase in tax rates
    
    
    
    
    
    
    
    
    
    
    52.7
    
    
    
    
    
    
    
    Net income
    
    $
    542.9
    
    
    $
    413.0
    
    
    $
    401.3
    
    
    $
    135.4
    
    
    $
    129.3
 (1)
    
    These earnings measures have no standardized meanings prescribed by Canadian GAAP and, therefore, are unlikely to be comparable
to similar measures of other companies. Other specified items are discussed further in this MD&A in this section under the sub-heading Other
Specified Items.
 09




---



##### 



Non-GAAP Performance Indicators
  For the year ended
    
    
    For the three months endedDecember 31
    
    
    December 31(unaudited)
    
    2005
    
    
    2004
    
    
    2003
    
    
    2005
    
    
    2004Diluted EPS, before FX on LTD
and other specified items (1)
    
    $
    3.30
    
    
    $
    2.27
    
    
    $
    2.07
    
    
    $
    1.06
    
    
    $
    0.73Diluted EPS,
related to FX on LTD  net of tax
    
    
    0.14
    
    
    
    0.59
    
    
    
    1.41
    
    
    
    (0.03
    )
    
    
    0.35Diluted EPS, related to other specified items  net of tax
    
    
    (0.05
    )
    
    
    (0.26
    )
    
    
    (0.96
    )
    
    
    (0.18
    )
    
    
    (0.27
    )Diluted EPS, as determined by GAAP
    
    $
    3.39
    
    
    $
    2.60
    
    
    $
    2.52
    
    
    $
    0.85
    
    
    $
    0.81
 (1)
    
    These earnings measures have no standardized meanings prescribed by Canadian GAAP and, therefore, are unlikely to be comparable
to similar measures of other companies. Other specified items are discussed further in this MD&A in this section under the sub-heading
Other Specified Items.
 Foreign Exchange Gains (Losses)
on Long-term Debt
     Other Specified Items
   
    
    A new restructuring
initiative to reduce
management and administrative
costs, which resulted in a
special charge of $28.3
million after tax ($44.2
million before tax) in the
fourth quarter of 2005. The
restructuring is intended to
eliminate more than 400
positions (discussed further
in this MD&A under the
subheading Restructuring in
the section Future Trends,
Commitments and Risks).
 
    
    As a result of a binding
settlement reached in the
third quarter of 2005, we
recognized a reduction of
$20.6 million after tax
($33.9 million before tax)
(discussed further in this
MD&A under the sub-heading
Environmental in the
section Future Trends,
Commitments and Risks) to a
special charge taken in the
fourth quarter of 2004. As
part of the settlement, we
received $3.6 million in cash
and were able to reduce by
$30.3 million an
environmental remediation
liability related to one of
our properties.
 10




---



##### 




    
    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 the U.S.
(discussed further in this
MD&A under the sub-heading
Environmental in the
section Future Trends,
Commitments and Risks).
    
    A favourable adjustment of
$12.4 million after tax ($19.0
million before tax) in the
fourth quarter of 2004,
reflecting a reduction of a
portion of the labour
liability included in the
special charge we took in the
second quarter of 2003 (discussed
below). The labour liability
included in the special charge in
2003 was for original estimates of
labour liabilities to be incurred
to restructure our northeastern
U.S. operations. In 2004, we
achieved a successful new
arrangement with Norfolk Southern
Railway that is generating
efficiency improvements to
operations in the region. As a
result, we did not incur the
expected labour restructuring
costs and the liability associated
with restructuring our
northeastern U.S. operations was
reversed.
  
    
    In the second quarter of
2003, we took a special
charge of $141.4 million
after tax ($215.1 million
before tax)
to reflect the costs associated
with a restructuring initiative
that was expected to eliminate
820 jobs by the end of 2005
(discussed further in this MD&A
under the sub-heading
Restructuring in the section
Future Trends, Commitments and
Risks) and to adjust the value
of certain under-performing
assets to fair value.
 
    
    In the fourth quarter of
2003, we transferred assets
to IBM under a seven-year,
$200-million agreement for
IBM to operate and enhance
our computing
infrastructure. The
arrangement will reduce our
costs over time and allow
remaining information
technology staff to focus on
applications that improve
efficiency and service. We
recognized a loss of $18.4
million after tax ($28.9
million before tax) on the
transfer of these assets.
 
    
    In December 2003, the
Government of Ontario
repealed previously announced
future income tax rate
reductions. We have adjusted
our future income taxes,
which were previously based
on these reduced rates,
upwards by $52.7 million to
reflect the change.
 
    
    Following a revaluation in
2003 of various other
components that determine
our future income tax
liability, we reduced the
estimate of our future income
tax liability by $59.3 million.
  Volumes
    11




---



##### 



Volumes
 For the year ended December 31
    
    2005
    
    
    2004
    (1)
    
    2003
    (1)Carloads (in thousands)Grain
    
    
    338.7
    
    
    
    321.2
    
    
    
    308.7Coal
    
    
    352.3
    
    
    
    395.2
    
    
    
    359.6Sulphur and fertilizers
    
    
    201.8
    
    
    
    211.8
    
    
    
    189.0Forest products
    
    
    153.7
    
    
    
    160.3
    
    
    
    164.2Industrial and consumer products
    
    
    322.2
    
    
    
    319.0
    
    
    
    298.6Automotive
    
    
    168.1
    
    
    
    171.7
    
    
    
    177.2Intermodal
    
    
    1,139.4
    
    
    
    1,119.6
    
    
    
    1,041.9Total carloads
    
    
    2,676.2
    
    
    
    2,698.8
    
    
    
    2,539.2Revenue ton-miles (in millions)Grain
    
    
    26,081
    
    
    
    23,805
    
    
    
    23,040Coal
    
    
    23,833
    
    
    
    25,241
    
    
    
    22,155Sulphur and fertilizers
    
    
    20,080
    
    
    
    20,418
    
    
    
    18,186Forest products
    
    
    9,953
    
    
    
    10,557
    
    
    
    10,789Industrial and consumer products
    
    
    15,936
    
    
    
    15,566
    
    
    
    14,733Automotive
    
    
    2,361
    
    
    
    2,291
    
    
    
    2,564Intermodal
    
    
    27,059
    
    
    
    25,749
    
    
    
    23,132Total revenue ton-miles
    
    
    125,303
    
    
    
    123,627
    
    
    
    114,599
 (1)
    
    Certain prior period figures have been reclassified to conform with presentation adopted in 2005.
 Revenues
   For the year ended December 31 (in millions)
    
    2005
    
    
    2004
    (1)
    
    2003
    (1)Grain
    
    $
    754.5
    
    
    $
    668.2
    
    
    $
    644.4Coal
    
    
    728.8
    
    
    
    530.3
    
    
    
    444.0Sulphur and fertilizers
    
    
    447.1
    
    
    
    460.0
    
    
    
    417.4Forest products
    
    
    333.9
    
    
    
    322.0
    
    
    
    328.8Industrial and consumer products
    
    
    542.9
    
    
    
    481.4
    
    
    
    459.9Automotive
    
    
    298.0
    
    
    
    288.5
    
    
    
    304.2Intermodal
    
    
    1,161.1
    
    
    
    1,034.7
    
    
    
    926.4Total freight revenues
    
    $
    4,266.3
    
    
    $
    3,785.1
    
    
    $
    3,525.1Other revenues
    
    
    125.3
    
    
    
    117.8
    
    
    
    135.6Total revenues
    
    $
    4,391.6
    
    
    $
    3,902.9
    
    
    $
    3,660.7
 (1)
    
    Certain prior period figures have been reclassified to conform with presentation adopted in 2005.
 12




---



##### 



Freight Revenues
   
    
    improved freight rates,
including fuel surcharges;
    
    our initiatives to increase
high-margin, long-haul traffic and
reduce low-margin, short-haul
traffic; and
    
    revenue recorded as a result of
an agreement reached with EVC,
which related to prior periods
(discussed further in this section
under the sub-heading Coal).
     Grain
   
    
    increased freight rates,
including fuel surcharges;
    
    higher volumes as a result
of a larger harvest in 2005
than in 2004; and
    
    increased export volumes in both
the Canadian and U.S. markets due
to strong worldwide demand for
grain and operational improvements
that have increased car
availability on trains to the U.S.
Pacific Northwest.
    Coal
  13




---



##### 




    
    higher freight rates;
    
    revenues recorded as a result
of the agreement reached with
EVC, which related to prior
periods (discussed below); and
    
    business from new U.S.
customers, which replaced certain
low-margin, short-haul traffic.
  
    
    initiatives to increase
high-margin, long-haul traffic
and reduce low-margin, short-haul
traffic, which resulted in lower
U.S. volumes and a minor decrease
in U.S. revenues;
    
    a decrease in coal
transported to the Port of
Vancouver as a result of a
customers decline in
production; and
    
    a decrease in Canadian coal
transported to the U.S. Midwest
due to a steel mill shutdown.
  
    
    a strong steel market,
which created higher world
demand for metallurgical
coal;
    
    increased freight rates;
    
    operational improvements
that allowed us to transport
more coal; and
    
    a positive freight rate
adjustment made in the fourth
quarter of 2004 for eastbound
coal shipments.
  Sulphur and Fertilizers
   
    
    the effect of the
change in Foreign
Exchange;
    
    reduced domestic shipments of
potash as a result of lower
producer inventories in the
first half of 2005; and
    
    lower domestic shipments of
potash in the fourth quarter of
2005 as a result of high potash
prices and reduced farm demand for
fertilizers.
   Forest Products
    
    
    the effect of the change in
Foreign Exchange; and
    
    severe winter weather
conditions that reduced car
availability and customer car
loading capacity in the first
half of 2004.
  Industrial and Consumer Products
  14




---



##### 




    
    higher freight rates,
including fuel surcharges; and
    
    greater demand for steel,
chemicals and energy and
construction products, driven by
economic expansion.
   
    
    higher freight rates;
    
    greater steel demand
driven by economic
expansion and pipeline
projects;
    
    a strong demand for aggregates
in the construction and
manufacturing sectors; and
    
    increased market share for plastics.
   Automotive
   
    
    higher freight rates,
including fuel surcharges; and
    
    increased RTMs as a result of
strong markets for import
vehicles.
   
    
    the effect of the
change in Foreign
Exchange;
    
    a decline in consumer demand
for certain vehicle models in
2004; and
    
    the loss of certain
business to a competing
railway.
  Intermodal
   
    
    increased freight rates,
including fuel surcharges;
    
    higher volumes at the Port of
Vancouver driven by strong
global trade; and
    
    an increase in rates charged for
the return of empty containers to
port.
  
    
    lower volumes compared to 2004
when a strike at a competing
railway caused an increase in
volumes for CPR; and
    
    reduced volumes and revenues due
to the elimination of our
Expressway
trailer-on-flatcar service between
Toronto and Detroit.
 15




---



##### 



Other Revenues
   
    
    the reclassification in 2005 of
certain proceeds from passenger
transportation to Other Revenues
from Operating Expenses, Before
Other Specified Items (effective
the first quarter of 2005); and
    
    increased land sale revenues.
  
    
    a portion of Other Revenues
reclassified to Freight
Revenues as a result of the
proportionate consolidation of a
business partnership; and
    
    an accrual adjustment
to leasing revenues.
  
    
    lower land and leasing revenues; and
    
    lower equity income
from business
partnerships.
   Freight Revenue per Carload
   
    
    higher freight rates,
including fuel surcharges;
    
    the adjustment for the
EVC agreement; and
    
    a longer average distance of haul.
   16




---



##### 



Freight Revenue per Carload
 For the year ended December 31 ($) (unaudited)
    
    2005
    
    
    2004
    (1)
    
    2003
    (1)Total freight revenue per carload
    
    
    1,594
    
    
    
    1,403
    
    
    
    1,388Grain
    
    
    2,228
    
    
    
    2,080
    
    
    
    2,087Coal
    
    
    2,069
    
    
    
    1,342
    
    
    
    1,235Sulphur and fertilizers
    
    
    2,216
    
    
    
    2,172
    
    
    
    2,208Forest products
    
    
    2,172
    
    
    
    2,009
    
    
    
    2,002Industrial and consumer products
    
    
    1,685
    
    
    
    1,509
    
    
    
    1,540Automotive
    
    
    1,773
    
    
    
    1,680
    
    
    
    1,717Intermodal
    
    
    1,019
    
    
    
    924
    
    
    
    889
 (1)
    
    Certain prior period figures have been reclassified to conform with presentation adopted in 2005.
   For the year ended December 31 (unaudited)
    
    2005
    
    
    2004
    (1)
    
    2003
    (1)Safety indicatorsFRA personal injuries per 200,000 employee-hours
    
    
    2.3
    
    
    
    2.7
    
    
    
    3.1FRA train accidents per million train-miles
    
    
    2.1
    
    
    
    2.1
    
    
    
    1.8Volume and productivity indicatorsGross ton-miles (GTM) of freight (millions)
    
    
    242,100
    
    
    
    236,451
    
    
    
    221,884Train-miles (thousands)
    
    
    43,054
    
    
    
    41,344
    
    
    
    40,470Average train weights (tons)
    
    
    5,623
    
    
    
    5,719
    
    
    
    5,483Efficiency and other indicatorsU.S. gallons of fuel per 1,000 GTMs
    
    
    1.18
    
    
    
    1.20
    
    
    
    1.24Average number of active employees
    
    
    16,448
    
    
    
    16,056
    
    
    
    16,126Miles of road operated at end of period
    
    
    13,626
    
    
    
    13,817
    
    
    
    13,848Freight revenue per RTM (cents)
    
    
    3.40
    
    
    
    3.06
    
    
    
    3.08
 (1)
    
    Certain prior period figures have been reclassified to conform with presentation adopted in 2005.
 17




---



##### 



Safety Indicators
  
    
    FRA personal injuries per
200,000 employee-hours; and
 
    
    FRA train accidents per
million train-miles.
   Productivity Indicators
  Efficiency and Other Indicators
 
    
    U.S. gallons of fuel per
1,000 GTMs improved 2 % in
2005, compared with 2004, as
a result of utilizing
additional fuel-efficient
locomotives; improved
Integrated Operating Plan
(IOP) design and execution;
and
fuel conservation efforts
(discussed under the sub-headings
General Risks and Crude Oil
Prices in the section Future
Trends, Commitments and Risks).
A 3 % improvement in 2004,
compared with 2003, was the
result of productivity
initiatives
and improved operating conditions.
    
    Our average number of active
employees increased 2 % in
2005, compared with 2004.
Train crews were hired to
handle business growth, and
additional workers were needed
for increased capital program
work in 2005, including a
major track expansion of our
western corridor. This hiring
more than offset job
reductions under restructuring
initiatives. Our average
number of active employees
decreased slightly in 2004,
compared with 2003, due to
reductions made under
restructuring initiatives,
partially offset by hiring to
handle business growth.
  (1)
 For the year ended December 31
    
    2005
    
    
    2004
    
    
    2003 (2)(in millions)
    
    Expense
    
    
    % of revenue
    
    
    Expense
    
    
    % of revenue
    
    
    Expense
    
    
    % of revenueCompensation and benefits
    
    $
    1,322.2
    
    
    
    30.1
    
    
    $
    1,259.6
    
    
    
    32.3
    
    
    $
    1,163.9
    
    
    
    31.8Fuel
    
    
    588.0
    
    
    
    13.4
    
    
    
    440.0
    
    
    
    11.3
    
    
    
    393.6
    
    
    
    10.8Materials
    
    
    203.3
    
    
    
    4.6
    
    
    
    178.5
    
    
    
    4.6
    
    
    
    179.2
    
    
    
    4.9Equipment rents
    
    
    210.0
    
    
    
    4.8
    
    
    
    218.5
    
    
    
    5.6
    
    
    
    238.5
    
    
    
    6.5Depreciation and amortization
    
    
    445.1
    
    
    
    10.1
    
    
    
    407.1
    
    
    
    10.4
    
    
    
    372.3
    
    
    
    10.2Purchased services and other
    
    
    621.6
    
    
    
    14.2
    
    
    
    610.7
    
    
    
    15.6
    
    
    
    583.6
    
    
    
    15.9Total
    
    $
    3,390.2
    
    
    
    77.2
    
    
    $
    3,114.4
    
    
    
    79.8
    
    
    $
    2,931.1
    
    
    
    80.1
 (1)
    
    These earnings measures have no standardized meanings prescribed by Canadian GAAP and, therefore, are unlikely to be comparable
to similar measures of other companies. These earnings measures and other specified items are described in the Non-GAAP Earnings
section of this MD&A.(2)
    
    Certain prior period figures have been reclassified to conform with presentation adopted in 2005 and 2004.
 18




---



##### 




    
    higher fuel, depreciation and
amortization, and compensation
and benefits costs;
    
    increased GTMs; and
    
    the effect of inflation.
   
    
    the impact of inflation;
    
    higher fuel,
depreciation, and
compensation and benefits
costs; and
    
    higher costs associated
with business growth.
  Compensation and Benefits
    
    
    higher costs associated with
employee incentive compensation
(due largely to increased share
prices affecting stock-based
compensation);
    
    the impact of inflation;
    
    selective hiring to handle
increased freight volumes; and
    
    increased pension costs.
   
    
    higher performance-based
incentive compensation in 2004,
compared with 2003 when these
expenses were below normal levels;
    
    the impact of inflation;
    
    increased pension costs;
    
    selective hiring to handle
increased freight volumes and the
associated training costs; and
    
    favourable expense
adjustments during the first
quarter of 2003.
  Fuel
   
    
    higher crude oil prices
and refining charges;
    
    business growth; and
    
    fuel tax refunds received in 2004.
  
 
 
  
    
    the change in Foreign Exchange;
    
    our fuel hedging program;
    
    fuel efficiency measures;
    
    favourable refining charges;
    
    fuel tax refunds in 2004; and
    
    positive inventory adjustments.
  2005 Annual Report |19




---



##### 



Materials
   
    
    increased wheel replacements on
freight cars, as well as higher
consumption of other materials
used to repair and service freight
cars;
    
    higher gasoline and
heating costs; and
    
    recoveries received from a
supplier in 2004.
   
    
    lower consumption of
materials used 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 the
change in Foreign
Exchange.
  Equipment Rents
   
    
    the effect of the
change in Foreign
Exchange;
    
    increased charges to
customers for loading and
unloading delays;
    
    lower payments to other
railways for the use of their
freight cars and locomotives,
due to more efficient movement
of traffic on our network; and
    
    favourable adjustments in the
first half of 2005 for freight
car rentals pertaining to prior
periods.
   
    
    the effect of the change
in Foreign Exchange;
    
    higher earnings from customers
and railways for the use of our
cars; and
    
    an overall reduction in
freight car rental rates.
  Depreciation and Amortization
     
    
    the effect of the change in
Foreign Exchange; and
    
    depreciation of assets
transferred in the fourth quarter
of 2003 to IBM under an
outsourcing agreement.
 Purchased Services and Other
  20 | 2005 Annual Report




---



##### 




    
    higher outsourced
maintenance costs as a result
of an increase in the volume
of work;
    
    higher contractor and
consulting fees, mainly for
strategic and regulatory
initiatives;
    
    certain proceeds from passenger
train operators, which are now
reflected in Other Revenues; and
    
    reduced overhead costs
allocated to capital projects.
  
    
    the effect of the
change in Foreign
Exchange;
    
    lower costs associated with
derailments, mishaps and personal
injuries; and
    
    lower joint-facility
inter-railway
expenditures.
  
    
    payments to IBM under an
outsourcing agreement commencing
in January 2004; and
    
    higher property and other
taxes, joint-facility
inter-railway costs, and
intermodal equipment repairs.
   Other Charges
   
    
    the effect of the change in
Foreign Exchange on working
capital accounts; and
    
    a gain realized when interest
rate locks were settled in the
first quarter of 2005.
  
    
    a gain recorded in the second
quarter of 2004 on the settlement
of our $105-million
cross-currency fixed-to-floating
interest rate swap agreements;
and
    
    an adjustment of an accrued
liability in the third quarter of
2004.
  
    
    changes in the fair value of
derivative instruments that were
not eligible for hedge accounting;
and
    
    the effect of the change in
Foreign Exchange on working
capital accounts.
 Interest Expense
   
    
    the positive effect of the
change in Foreign Exchange; and
    
    the retirement of the
$250-million Medium Term Notes in
June 2005 (discussed further in
this MD&A under the sub-heading
Financing Activities in the
section Liquidity and Capital
Resources).
   
    
    the positive effect of the
change in Foreign Exchange;
    
    savings from interest rate swaps
on US$200 million of the
US$400-million 6.25 % Notes (discussed further in
this MD&A in the section
Financial Instruments); and
 2005 Annual Report | 21




---



##### 




    
    the replacement of higher-cost
debt with lower-cost debt.
  
    
    interest on a new locomotive
capital lease entered into in the
first quarter of 2004 (discussed
further in this MD&A under the
sub-heading Financing Activities
in the section Liquidity and
Capital Resources);
    
    interest on the $350-million
4.9 % Medium Term Notes issued
in July 2003 (discussed further
in this MD&A under the
sub-heading Financing
Activities in the section
Liquidity and Capital
Resources); and
    
    the cancellation in
second-quarter 2004 of the
cross-currency swaps on $105
million of the $350-million 4.9 %
Medium Term Notes, which resulted
in lower cost savings.
 Income Taxes
         22 | 2005 Annual Report




---



##### 



Operating Results
   
    
    higher revenues resulting from
increased freight rates (discussed
in this section under the
sub-heading Revenues); and
    
    a special charge of $90.9
million taken in the fourth
quarter of 2004 to cover clean-up
costs for environmental
contamination at a property in the
U.S. (discussed further in this
MD&A under the sub-heading
Environmental in the section
Future Trends, Commitments and
Risks), compared with
fourth-quarter 2005 when there
were no such special charges.
  
    
    higher costs for fuel,
materials and depreciation and
amortization (discussed in this
section under the sub-heading
Operating Expenses, Before Other
Specified Items);
    
    a special charge of $28.3 million
after tax ($44.2 million before
tax) taken in the fourth quarter of
2005 for a new restructuring
initiative to reduce management and
administrative costs (discussed
further in this MD&A under the
sub-heading Other Specified Items
in the section Non-GAAP
Earnings); and
    
    a reduction of $19.0 million
taken in the fourth quarter of
2004, related to the restructuring
portion of a special charge taken
in the second quarter of 2003
(discussed further in this MD&A
under the sub-heading Other
Specified Items), compared with
fourth-quarter 2005 when no such
reductions occurred.
  
    
    an FX loss on LTD of $5.1
million after tax in the fourth
quarter of 2005, compared with a
$55.8 million after-tax gain in
the same period of 2004; and
    
    higher income tax expenses
(discussed in this section
under the sub-heading Other
Income Statement Items).
  Non-GAAP Earnings
   Revenues
  2005 Annual Report | 23




---



##### 



Grain
  Coal
  
    
    decisions made through our
initiatives to increase
high-margin, long-haul traffic and
reduce low-margin, short-haul
traffic, which resulted in
decreased U.S. volumes and a minor
decrease in revenues;
    
    a customers decreased
production in the fourth quarter
of 2005, which resulted in lower
volumes of coal transported to the
Port of Vancouver; and
    
    a steel mill shutdown, which
reduced Canadian coal transported
to the U.S. Midwest.
 Sulphur and Fertilizers
  Forest Products
  Industrial and Consumer Products
   Automotive
  Intermodal
    24 | 2005 Annual Report




---



##### 



Operating Expenses, Before Other Specified Items
  Compensation and Benefits
  Fuel
  Materials
  Equipment Rents
  Depreciation and Amortization
  Purchased Services and Other
  Other Income Statement Items
    Liquidity and Capital Resources
  2005 Annual Report | 25




---



##### 



For the quarter ended(in millions, except per share data)
    
    2005
    
    
    2004(unaudited)
    
    Dec. 31
    
    
    Sept. 30
    
    
    June 30
    
    
    Mar. 31
    
    
    Dec. 31
    
    
    Sept. 30
    
    
    June 30
    
    
    Mar. 31Total revenue (1)
    
    $
    1,166.9
    
    
    $
    1,104.7
    
    
    $
    1,105.9
    
    
    $
    1,014.1
    
    
    $
    1,021.9
    
    
    $
    989.7
    
    
    $
    1,004.7
    
    
    $
    886.6Operating income (1)
    
    $
    258.0
    
    
    $
    283.3
    
    
    $
    271.1
    
    
    $
    178.7
    
    
    $
    161.1
    
    
    $
    218.9
    
    
    $
    220.6
    
    
    $
    116.0Net income (1)
    
    $
    135.4
    
    
    $
    203.6
    
    
    $
    123.2
    
    
    $
    80.7
    
    
    $
    129.3
    
    
    $
    176.5
    
    
    $
    83.7
    
    
    $
    23.5Operating income, before
other specified items (2)
    
    $
    302.2
    
    
    $
    249.4
    
    
    $
    271.1
    
    
    $
    178.7
    
    
    $
    233.0
    
    
    $
    218.9
    
    
    $
    220.6
    
    
    $
    116.0Income, before FX
on LTD and other
specified items (2)
    
    $
    168.8
    
    
    $
    134.9
    
    
    $
    140.0
    
    
    $
    84.6
    
    
    $
    116.3
    
    
    $
    103.8
    
    
    $
    103.5
    
    
    $
    37.8Basic earnings per share (1)
    
    $
    0.86
    
    
    $
    1.29
    
    
    $
    0.78
    
    
    $
    0.51
    
    
    $
    0.81
    
    
    $
    1.11
    
    
    $
    0.53
    
    
    $
    0.15Diluted earnings per share (1)
    
    $
    0.85
    
    
    $
    1.27
    
    
    $
    0.77
    
    
    $
    0.50
    
    
    $
    0.81
    
    
    $
    1.11
    
    
    $
    0.53
    
    
    $
    0.15Diluted earnings per share,
before FX on LTD and
other specified items (2)
    
    $
    1.06
    
    
    $
    0.84
    
    
    $
    0.87
    
    
    $
    0.53
    
    
    $
    0.73
    
    
    $
    0.65
    
    
    $
    0.65
    
    
    $
    0.24
 
 (1)
    
    This information is in Canadian dollars and has been prepared in accordance with
Canadian GAAP.(2)
    
    These earnings measures have no standardized meanings prescribed by Canadian GAAP
and, therefore, are unlikely to be comparable to similar measures of other companies. These
earnings measures and other specified items are described in the Non-GAAP Earnings section of
this MD&A. A reconciliation of income and EPS, before FX on LTD and other specified items, to net
income and EPS, as presented in the financial statements is provided in the Non-GAAP Earnings
section of this MD&A. This information is in Canadian dollars. Quarterly Trends
      2005 Accounting Changes
  Implicit Leases
  26 | 2005 Annual Report




---



##### 



Future Accounting Changes
  Financial Instruments and Other Comprehensive Income
   Non-monetary Transactions
    Operating Activities
   
    
    a greater amount of cash
being generated through
operations in 2005;
    
    reduced restructuring payments; and
    
    lower pension funding contributions.
 2005 Annual Report | 27




---



##### 




    
    a larger amount of cash
being generated through
operations in 2004;
    
    an additional pension
funding payment of $300.0
million in the fourth quarter
of 2003; and
    
    reduced restructuring
payments in 2004.
  Investing Activities
      Financing Activities
   
    
    the repayment of
$250-million Medium Term
Notes (discussed below);
    
    the issuance in 2004 of
US$145-million Senior Secured
Notes (discussed below), compared
with 2005 when no debt was issued;
and
    
    payments made to buy back shares
under our share repurchase program
(discussed further under the
subheading Share Capital in the
section Balance Sheet).
    28 | 2005 Annual Report




---



##### 



Free Cash
    2005 Annual Report | 29




---



##### 



Calculation of Free Cash
  For the year ended December 31 (in millions) (unaudited)
    
    2005
    
    
    2004
    
    
    2003 (1)Cash provided by operating activities
    
    $
    1,050.7
    
    
    $
    786.0
    
    
    $
    305.7Cash used in investing activities
    
    
    (869.2
    )
    
    
    (666.1
    )
    
    
    (700.3
    )Dividends paid on Common Shares
    
    
    (89.5
    )
    
    
    (81.7
    )
    
    
    (80.8
    )Free cash (2)
    
    
    92.0
    
    
    
    38.2
    
    
    
    (475.4
    )Cash (used in) provided by financing activities, before dividend payment
    
    
    (323.2
    )
    
    
    180.1
    
    
    
    325.2(Decrease) increase in cash, as shown on the Statement of Consolidated Cash Flows
    
    
    (231.2
    )
    
    
    218.3
    
    
    
    (150.2
    )Net cash at beginning of period
    
    
    353.0
    
    
    
    134.7
    
    
    
    284.9Net cash at end of period
    
    $
    121.8
    
    
    $
    353.0
    
    
    $
    134.7
 
 (1)
    
    Certain prior period figures have been reclassified to conform with presentation
adopted in 2004 and 2005.(2)
    
    These measures have no standardized meanings prescribed by Canadian GAAP and,
therefore, are unlikely to be comparable to similar measures of other companies. These earnings
measures and other specified items are described in the Non-GAAP Earnings section of this MD&A.  Assets
  
    
    capital additions, most of
which were locomotives and
track replacement and expansion, of
our western corridor and other
sections of track; and
    
    an increase in accounts
receivable as higher freight rates
and volumes resulted in increased
amounts billed to customers.
   
    
    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.
 Total Liabilities
   
    
    the repayment of the
$250-million principal amount
7.20 % Medium Term Notes in the
second quarter of 2005; and
    
    the effect of the change in
Foreign Exchange on long-term
debt.
   
    
    higher accrued payroll
liabilities, most of which
reflected a more normal level of
incentive compensation;
    
    larger future income tax
balances resulting from tax
rate increases in the Province
of Ontario; and
    
    an increase in trade accounts
payable, mainly for amounts owing
to other railways for
transporting our customers
freight.
 30 | 2005 Annual Report




---



##### 



Equity
  Share Capital
          2005 Annual Report | 31




---



##### 



Interest Rate Management
  Interest Rate Swaps
  Interest and Treasury Rate Locks
   Foreign Exchange Management
  Foreign Exchange Forward Contracts
  32 | 2005 Annual Report




---



##### 



Fuel Price Management
 Crude Oil Swaps
        Sale of Accounts Receivable
   2005 Annual Report | 33




---



##### 



Payments due by period
    
    
    
    
    
    Less than
    
    
    1  3
    
    
    3  5
    
    
    AfterAt December 31, 2005 (in millions)
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsLong-term debt
    
    $
    2,679.7
    
    
    $
    23.5
    
    
    $
    177.9
    
    
    $
    394.2
    
    
    $
    2,084.1Capital lease obligations
    
    
    321.1
    
    
    
    6.5
    
    
    
    16.0
    
    
    
    35.8
    
    
    
    262.8Operating lease obligations (1)
    
    
    602.2
    
    
    
    150.7
    
    
    
    184.8
    
    
    
    88.6
    
    
    
    178.1Supplier purchase obligations
    
    
    603.8
    
    
    
    98.4
    
    
    
    152.0
    
    
    
    120.1
    
    
    
    233.3Other long-term liabilities reflected
on our Consolidated Balance Sheet (2)
    
    
    985.1
    
    
    
    150.4
    
    
    
    245.3
    
    
    
    175.9
    
    
    
    413.5Total contractual obligations
    
    $
    5,191.9
    
    
    $
    429.5
    
    
    $
    776.0
    
    
    $
    814.6
    
    
    $
    3,171.8
 
 (1)
    
    We have guaranteed residual values on certain leased equipment with a maximum
exposure of $320.4 million, primarily in 2006 and beyond. Management estimates that we will have no
net payments under these residual guarantees and, as such, has not included any amounts with
respect to these guaranteed residual values in the minimum payments shown above.(2)
    
    Includes expected cash payments for restructuring, environmental remediation, asset
retirement obligations, post-retirement benefits, workers compensation benefits and pension
benefit payments for a pension plan that we administer. Projected payments for post-retirement
benefits and workers compensation benefits include the anticipated payments for years 2006 to
2015. Pension contribution and pension benefit payments for our two main pension plans are not
included due to the volatility in calculating them. Pension payments are discussed further under
the sub-heading Pension Plan Deficit in the section Future Trends, Commitments and Risks. 34 | 2005 Annual Report




---



##### 



Rail Network Capacity
  Agreements
  General Risks
       2005 Annual Report | 35




---



##### 



Stock Price
  Crude Oil Prices
    Border Security
     Labour Relations
  36 | 2005 Annual Report




---



##### 



Canada
   U.S.
     Environmental
      2005 Annual Report | 37




---



##### 



Certain Other Financial Commitments
 Amount of commitment per period2007 &
    
    
    2009 &
    
    
    2011 &At December 31, 2005 (in millions) (unaudited)
    
    Total
    
    
    2006
    
    
    2008
    
    
    2010
    
    
    beyondLetters of credit
    
    $
    356.4
    
    
    $
    356.4
    
    
    $
    
    
    
    $
    
    
    
    $
    Capital commitments (1)
    
    
    626.7
    
    
    
    348.3
    
    
    
    101.1
    
    
    
    65.6
    
    
    
    111.7Offset financial liability
    
    
    169.2
    
    
    
    169.2
    
    
    
    
    
    
    
    
    
    
    
    Total commitments
    
    $
    1,152.3
    
    
    $
    873.9
    
    
    $
    101.1
    
    
    $
    65.6
    
    
    $
    111.7
 
 (1)
    
    We have several contracts outstanding with termination payments ranging from
$nil to $24.2 million per contract, and resulting in a minimum exposure of $3.3 million and a
maximum exposure of $54.1 million, depending on the date of termination. These contracts are not
reflected in the commitments above and terminate mainly between 2006 and 2013. Financial Commitments
  Letters of Credit
  Capital Commitments
   Offset Financial Liability
  38 | 2005 Annual Report




---



##### 



Pension Plan Deficit
      Restructuring
  2005 Annual Report | 39




---



##### 



Environmental Liabilities
    40 | 2005 Annual Report




---



##### 



Pensions and Other Benefits
       2005 Annual Report | 41




---



##### 



Property, Plant and Equipment
      Future Income Taxes
      42 | 2005 Annual Report




---



##### 



Legal and Personal Injury Liabilities
          Securities Exchange Act of 1934
 2005 Annual Report | 43




---



##### 



FORWARD-LOOKING INFORMATION
 Private Securities
Litigation Reform Act of 1995
       Canada Transportation Act,
  44




---



##### 



Average number of active employees
 Average train weights
 Carloads
 CICA
 Class 1 railway
 CPRL
 CPR, the Company
 Diluted EPS, before FX on LTD and other specified items
 D&H
 DSOP
 EPS
 EVC
 Fluidity
 Foreign Exchange
 FRA
 FRA personal injuries per 200,000 employee-hours
 FRA train accidents per million train-miles
 Freight revenue per RTM
 FX on LTD
 GAAP
 GTMs or gross ton-miles
 IOP
 LIBOR
 MD&A
 45




---



##### 



Miles of road operated
 MSOIP
 Operating Ratio
 RTMs or revenue ton-miles
 Soo Line
 STB
 Train-miles
 U.S. gallons of fuel per 1,000 GTMs
 WCB
 WTI
 46




---



##### 



MANAGEMENTS RESPONSIBILITY FOR FINANCIAL REPORTING
    -s- Michael T. Waites
    
    -s- Robert J. RitchieMICHAEL T. WAITES
    
    ROBERT J. RITCHIEExecutive Vice-President and Chief Financial Officer
    
    Chief Executive OfficerFebruary 20, 2006
 47




---



##### 



To the shareholders of Canadian Pacific Railway Limited
    (PRICEWATERHOUSECOOPERS LLP)PRICEWATERHOUSECOOPERS LLPChartered AccountantsCalgary, AlbertaFebruary 10, 2006
 Comments by Auditors for
U.S. Readers on Canada-U.S.
Reporting Difference
  (PRICEWATERHOUSECOOPERS LLP)PRICEWATERHOUSECOOPERS LLPChartered AccountantsCalgary, AlbertaFebruary 10, 2006
 48




---



##### 



Year ended December 31 (in millions, except per share data)
    
    2005
    
    
    2004
    
    
    2003RevenuesFreight (Note 7)
    
    $
    4,266.3
    
    
    $
    3,785.1
    
    
    $
    3,525.1Other
    
    
    125.3
    
    
    
    117.8
    
    
    
    135.64,391.6
    
    
    
    3,902.9
    
    
    
    3,660.7Operating expensesCompensation and benefits
    
    
    1,322.2
    
    
    
    1,259.6
    
    
    
    1,163.9Fuel
    
    
    588.0
    
    
    
    440.0
    
    
    
    393.6Materials
    
    
    203.3
    
    
    
    178.5
    
    
    
    179.2Equipment rents
    
    
    210.0
    
    
    
    218.5
    
    
    
    238.5Depreciation and amortization
    
    
    445.1
    
    
    
    407.1
    
    
    
    372.3Purchased services and other
    
    
    621.6
    
    
    
    610.7
    
    
    
    583.63,390.2
    
    
    
    3,114.4
    
    
    
    2,931.1Operating income, before the following:
    
    
    1,001.4
    
    
    
    788.5
    
    
    
    729.6Special charge for (reduction to) environmental
remediation (Notes 4 and 21)
    
    
    (33.9
    )
    
    
    90.9
    
    
    
    Special charge for (reduction to) labour restructuring
and asset impairment (Notes 5 and 21)
    
    
    44.2
    
    
    
    (19.0
    )
    
    
    215.1Loss on transfer of assets to outsourcing firm (Note 6)
    
    
    
    
    
    
    
    
    
    
    28.9Operating income
    
    
    991.1
    
    
    
    716.6
    
    
    
    485.6Other charges (Note 8)
    
    
    18.1
    
    
    
    36.1
    
    
    
    33.5Foreign exchange gain on long-term debt
    
    
    (44.7
    )
    
    
    (94.4
    )
    
    
    (209.5
    )Interest expense (Note 9)
    
    
    204.2
    
    
    
    218.6
    
    
    
    218.7Income tax expense (Note 10)
    
    
    270.6
    
    
    
    143.3
    
    
    
    41.6Net income
    
    $
    542.9
    
    
    $
    413.0
    
    
    $
    401.3Basic earnings per share (Note 11)
    
    $
    3.43
    
    
    $
    2.60
    
    
    $
    2.53Diluted earnings per share (Note 11)
    
    $
    3.39
    
    
    $
    2.60
    
    
    $
    2.52
  49




---



##### 



As at December 31 (in millions)
    
    2005
    
    
    2004AssetsCurrent assetsCash and cash equivalents
    
    $
    121.8
    
    
    $
    353.0Accounts receivable and other current
assets (Note 12)
    
    
    524.0
    
    
    
    434.7Materials and supplies
    
    
    140.1
    
    
    
    134.1Future income taxes (Note 10)
    
    
    108.0
    
    
    
    70.2893.9
    
    
    
    992.0Investments (Note 14)
    
    
    67.3
    
    
    
    96.0Net properties (Note 15)
    
    
    8,790.9
    
    
    
    8,393.5Other assets and deferred charges (Note 16)
    
    
    1,139.0
    
    
    
    1,018.3Total assets
    
    $
    10,891.1
    
    
    $
    10,499.8Liabilities and shareholders equityCurrent liabilitiesAccounts payable and accrued liabilities
    
    $
    1,032.8
    
    
    $
    975.3Income and other taxes payable
    
    
    30.2
    
    
    
    16.2Dividends payable
    
    
    23.7
    
    
    
    21.0Long-term debt maturing within one year
(Note 17)
    
    
    30.0
    
    
    
    275.71,116.7
    
    
    
    1,288.2Deferred liabilities (Note 19)
    
    
    743.5
    
    
    
    767.8Long-term debt (Note 17)
    
    
    2,970.8
    
    
    
    3,075.3Future income taxes (Note 10)
    
    
    1,674.4
    
    
    
    1,386.1Shareholders equity(Note 22)Share capital
    
    
    1,141.5
    
    
    
    1,120.6Contributed surplus
    
    
    241.6
    
    
    
    300.4Foreign currency translation adjustments
    
    
    67.5
    
    
    
    77.0Retained income
    
    
    2,935.1
    
    
    
    2,484.44,385.7
    
    
    
    3,982.4Total liabilities and shareholders equity
    
    $
    10,891.1
    
    
    $
    10,499.8
   -s- J.E. Newall
    
    -s- R. PhillipsApproved on behalf of the Board:
    
    J.E. Newall, Director
    
    R. Phillips, Director
 50




---



##### 



Year ended December 31 (in millions)
    
    2005
    
    
    2004
    
    
    2003Operating activitiesNet income
    
    $
    542.9
    
    
    $
    413.0
    
    
    $
    401.3Add (deduct) items not affecting cashDepreciation and amortization
    
    
    445.1
    
    
    
    407.1
    
    
    
    372.3Future income taxes (Note 10)
    
    
    258.0
    
    
    
    131.5
    
    
    
    31.8Environmental remediation charge (Note 4)
    
    
    (30.9
    )
    
    
    90.9
    
    
    
    Restructuring and impairment charge (Note 5)
    
    
    44.2
    
    
    
    (19.0
    )
    
    
    215.1Foreign exchange gain on long-term debt
    
    
    (44.7
    )
    
    
    (94.4
    )
    
    
    (209.5
    )Amortization of deferred charges
    
    
    19.5
    
    
    
    24.7
    
    
    
    20.3Restructuring and environmental payments (Note 21)
    
    
    (69.0
    )
    
    
    (88.8
    )
    
    
    (107.0
    )Other operating activities, net
    
    
    (91.1
    )
    
    
    (112.2
    )
    
    
    (365.0
    )Change in non-cash working capital balances related to operations (Note 13)
    
    
    (23.3
    )
    
    
    33.2
    
    
    
    (53.6
    )Cash provided by operating activities
    
    
    1,050.7
    
    
    
    786.0
    
    
    
    305.7Investing activitiesAdditions to properties (Note 15)
    
    
    (884.4
    )
    
    
    (673.8
    )
    
    
    (686.6
    )Other investments
    
    
    2.0
    
    
    
    (2.5
    )
    
    
    (21.9
    )Net proceeds from disposal of transportation properties
    
    
    13.2
    
    
    
    10.2
    
    
    
    8.2Cash used in investing activities
    
    
    (869.2
    )
    
    
    (666.1
    )
    
    
    (700.3
    )Financing activitiesDividends paid
    
    
    (89.5
    )
    
    
    (81.7
    )
    
    
    (80.8
    )Issuance of CPR Common Shares
    
    
    31.8
    
    
    
    2.5
    
    
    
    2.0Purchase of CPR Common Shares
    
    
    (80.6
    )
    
    
    
    
    
    
    Issuance of long-term debt
    
    
    
    
    
    
    193.7
    
    
    
    699.8Repayment of long-term debt
    
    
    (274.4
    )
    
    
    (16.1
    )
    
    
    (376.6
    )Cash (used in) provided by financing activities
    
    
    (412.7
    )
    
    
    98.4
    
    
    
    244.4Cash position(Decrease) increase in cash and cash equivalents
    
    
    (231.2
    )
    
    
    218.3
    
    
    
    (150.2
    )Cash and cash equivalents at beginning of year
    
    
    353.0
    
    
    
    134.7
    
    
    
    284.9Cash and cash equivalents at end of year
    
    $
    121.8
    
    
    $
    353.0
    
    
    $
    134.7
  51




---



##### 



Year ended December 31 (in millions)
    
    2005
    
    
    2004
    
    
    2003Balance, January 1
    
    $
    2,484.4
    
    
    $
    2,153.9
    
    
    $
    1,833.4Net income for the year
    
    
    542.9
    
    
    
    413.0
    
    
    
    401.3Dividends
    
    
    (92.2
    )
    
    
    (82.5
    )
    
    
    (80.8
    )Balance, December 31
    
    $
    2,935.1
    
    
    $
    2,484.4
    
    
    $
    2,153.9
  52




---



##### 



1. Summary of Significant Accounting Policies
 Principles of Consolidation
   Principal Subsidiaries
  Incorporated under
    
    Percentage of voting securitiesPrincipal subsidiary
    
    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 %Mount Stephen Properties Inc. (MSP)
    
    Canada
    
    100 %
 Revenue Recognition
  Cash and Cash Equivalents
  Foreign Currency Translation
  53




---



##### 



Pensions and Other Benefits
   Materials and Supplies
  Properties
    54




---



##### 



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
      55




---



##### 



Restructuring Accrual and Environmental Remediation
  Income Taxes
  Earnings Per Share
  Stock-based Compensation
   2. New Accounting Policies
 Hedging Transactions
  56




---



##### 



3.   Future Accounting Changes
 Non-monetary Transactions
  Financial Instruments, Hedging and Comprehensive Income
   4.   Special Charge for (Reduction to) Environmental Remediation
  57




---



##### 



5. Special Charge for (Reduction to) Labour Restructuring and Asset Impairment
    6. Loss on Transfer of Assets to Outsourcing Firm
  7. Change in Accounting Estimate
  8. Other Charges
 (in millions)
    
    2005
    
    
    2004
    
    
    2003Amortization of discount on accruals recorded at present value
    
    $
    15.4
    
    
    $
    19.1
    
    
    $
    20.3Other exchange (gains) losses
    
    
    (2.2
    )
    
    
    11.7
    
    
    
    0.4Loss on sale of accounts receivable (Note 12)
    
    
    3.5
    
    
    
    2.9
    
    
    
    4.1Gain on non-hedging derivative instruments
    
    
    (6.6
    )
    
    
    (1.5
    )
    
    
    Other
    
    
    8.0
    
    
    
    3.9
    
    
    
    8.7Total other charges
    
    $
    18.1
    
    
    $
    36.1
    
    
    $
    33.5
 58




---



##### 



9. Interest Expense
 (in millions)
    
    2005
    
    
    2004
    
    
    2003Interest expense
    
    $
    211.8
    
    
    $
    223.9
    
    
    $
    226.4Interest income
    
    
    (7.6
    )
    
    
    (5.3
    )
    
    
    (7.7
    )Net interest expense
    
    $
    204.2
    
    
    $
    218.6
    
    
    $
    218.7Gross cash interest payments
    
    $
    199.6
    
    
    $
    219.0
    
    
    $
    228.7
 10. Income Taxes
  (in millions)
    
    2005
    
    
    2004
    
    
    2003Canada (domestic)Current income tax expense
    
    $
    10.3
    
    
    $
    10.6
    
    
    $
    9.2Future income tax expenseOrigination and reversal of temporary differences
    
    
    213.9
    
    
    
    162.4
    
    
    
    144.4Effect of tax rate increases
    
    
    
    
    
    
    
    
    
    
    51.6Recognition of previously unrecorded tax losses
    
    
    (17.2
    )
    
    
    (29.1
    )
    
    
    (59.1
    )Effect of hedge of net investment in self-sustaining foreign subsidiaries
    
    
    (2.1
    )
    
    
    (8.7
    )
    
    
    (34.6
    )Other
    
    
    (1.0
    )
    
    
    (14.5
    )
    
    
    (58.2
    )Total future income tax expense
    
    
    193.6
    
    
    
    110.1
    
    
    
    44.1Total income taxes (domestic)
    
    $
    203.9
    
    
    $
    120.7
    
    
    $
    53.3Other (foreign)Current income tax expense
    
    $
    2.3
    
    
    $
    1.2
    
    
    $
    0.6Future income tax expenseOrigination and reversal of temporary differences
    
    
    64.4
    
    
    
    23.2
    
    
    
    10.4Recognition of previously unrecorded tax losses
    
    
    
    
    
    
    
    
    
    
    (22.7
    )Other
    
    
    
    
    
    
    (1.8
    )
    
    
    Total future income tax expense
    
    
    64.4
    
    
    
    21.4
    
    
    
    (12.3
    )Total income taxes (foreign)
    
    $
    66.7
    
    
    $
    22.6
    
    
    $
    (11.7
    )TotalCurrent income tax expense
    
    $
    12.6
    
    
    $
    11.8
    
    
    $
    9.8Future income tax expense
    
    
    258.0
    
    
    
    131.5
    
    
    
    31.8Total income taxes (domestic and foreign)
    
    $
    270.6
    
    
    $
    143.3
    
    
    $
    41.6
 59




---



##### 



(in millions)
    
    2005
    
    
    2004Future income tax assetsRestructuring liability
    
    $
    97.3
    
    
    $
    101.2Amount related to tax losses carried forward
    
    
    132.6
    
    
    
    164.6Liabilities carrying value in excess of tax basis
    
    
    44.4
    
    
    
    38.0Future environmental remediation costs
    
    
    47.7
    
    
    
    65.0Other
    
    
    35.8
    
    
    
    30.8Total future income tax assets
    
    
    357.8
    
    
    
    399.6Future income tax liabilitiesCapital assets carrying value in excess of tax basis
    
    
    1,570.6
    
    
    
    1,379.7Other long-term assets carrying value in excess of tax basis
    
    
    338.6
    
    
    
    303.7Other
    
    
    15.0
    
    
    
    32.1Total future income tax liabilities
    
    
    1,924.2
    
    
    
    1,715.5Net future income tax liabilities
    
    
    1,566.4
    
    
    
    1,315.9Net current future income tax assets
    
    
    108.0
    
    
    
    70.2Net long-term future income tax liabilities
    
    $
    1,674.4
    
    
    $
    1,386.1
  (in millions)
    
    2005
    
    
    2004
    
    
    2003Expected income tax expense at Canadian statutory tax rates
    
    $
    291.8
    
    
    $
    202.4
    
    
    $
    168.0Increase (decrease) in taxes resulting from:Large corporations tax
    
    
    8.3
    
    
    
    5.9
    
    
    
    11.1Gains not subject to tax
    
    
    (22.0
    )
    
    
    (31.8
    )
    
    
    (50.5
    )Foreign tax rate differentials
    
    
    2.7
    
    
    
    6.8
    
    
    
    19.2Effect of tax rate increases
    
    
    
    
    
    
    
    
    
    
    51.6Recognition of previously unrecorded tax losses
    
    
    (17.2
    )
    
    
    (29.1
    )
    
    
    (81.8
    )Other
    
    
    7.0
    
    
    
    (10.9
    )
    
    
    (76.0
    )Income tax expense
    
    $
    270.6
    
    
    $
    143.3
    
    
    $
    41.6
 60




---



##### 



11. Earnings Per Share
     (in millions)
    
    2005
    
    
    2004
    
    
    2003Weighted average shares outstanding
    
    
    158.4
    
    
    
    158.7
    
    
    
    158.5Dilutive effect of stock options
    
    
    1.7
    
    
    
    0.4
    
    
    
    0.6Weighted average diluted shares outstanding
    
    
    160.1
    
    
    
    159.1
    
    
    
    159.1
 (in dollars)
    
    2005
    
    
    2004
    
    
    2003Basic earnings per share
    
    $
    3.43
    
    
    $
    2.60
    
    
    $
    2.53Diluted earnings per share
    
    $
    3.39
    
    
    $
    2.60
    
    
    $
    2.52
  12. Sale of Accounts Receivable
  61




---



##### 



2005
    
    
    2004Proceeds from new securitizations
    
    $
    
    
    
    $
    120.0Proceeds from collections reinvested
    
    $
    1,480.6
    
    
    $
    382.4
 13. Change in Non-cash Working Capital Balances Related to Operations
 (in millions)
    
    2005
    
    
    2004
    
    
    2003(Use) source of cash:Accounts receivable and other current assets
    
    $
    (61.8
    )
    
    $
    (39.0
    )
    
    $
    45.2Materials and supplies
    
    
    (14.6
    )
    
    
    (35.5
    )
    
    
    2.5Accounts payable and accrued liabilities
    
    
    39.1
    
    
    
    112.3
    
    
    
    (76.3
    )Income and other taxes payable
    
    
    14.0
    
    
    
    (4.6
    )
    
    
    (25.0
    )Change in non-cash working capital
    
    $
    (23.3
    )
    
    $
    33.2
    
    
    $
    (53.6
    )
 62




---



##### 



14. Investments
 (in millions)
    
    2005
    
    
    2004Rail investments accounted for on an equity basis
    
    $
    34.7
    
    
    $
    74.7Other investments accounted for on a cost basis
    
    
    32.6
    
    
    
    21.3Total investments
    
    $
    67.3
    
    
    $
    96.0
   15. Net Properties
 Accumulated
    
    
    Net book(in millions)
    
    Cost
    
    
    depreciation
    
    
    value2005Track and roadway
    
    $
    8,180.0
    
    
    $
    2,614.2
    
    
    $
    5,565.8Buildings
    
    
    329.7
    
    
    
    143.0
    
    
    
    186.7Rolling stock
    
    
    3,448.5
    
    
    
    1,395.7
    
    
    
    2,052.8Other
    
    
    1,610.5
    
    
    
    624.9
    
    
    
    985.6Total net properties
    
    $
    13,568.7
    
    
    $
    4,777.8
    
    
    $
    8,790.92004Track 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
    
    
    $
    8,393.5
   63




---



##### 



16. Other Assets and Deferred Charges
 (in millions)
    
    2005
    
    
    2004Prepaid pension costs
    
    $
    944.8
    
    
    $
    838.3Other(1)
    
    
    194.2
    
    
    
    180.0Total other assets and deferred charges
    
    $
    1,139.0
    
    
    $
    1,018.3
 (1)At December 31, 2005, the category Other included assets held for sale that
had a carrying value of $37.1 million (2004  nil) that were reclassified from Net Properties.
 17. Long-term Debt
 Currency in(in millions)
    
    which payable

    
    2005
    
    
    20046.250 % Notes due 2011
    
    US$
    
    $
    465.2
    
    
    $
    480.87.125 % Debentures due 2031
    
    US$
    
    
    407.1
    
    
    
    420.79.450 % Debentures due 2021
    
    US$
    
    
    290.7
    
    
    
    300.55.750 % Debentures due 2033
    
    US$
    
    
    290.7
    
    
    
    300.57.20 % Medium Term Notes due 2005
    
    CDN$
    
    
    
    
    
    
    250.04.90 % Medium Term Notes due 2010
    
    CDN$
    
    
    350.0
    
    
    
    350.05.41 % Senior Secured Notes due 2024
    
    US$
    
    
    163.6
    
    
    
    172.66.91 % Secured Equipment Notes due 2006  2024
    
    CDN$
    
    
    229.3
    
    
    
    235.07.49 % Equipment Trust Certificates due 2006  2021
    
    US$
    
    
    137.6
    
    
    
    144.2Secured Equipment Loan due 2006  2007
    
    US$
    
    
    143.1
    
    
    
    153.4Secured Equipment Loan due 2006  2015
    
    CDN$
    
    
    154.0
    
    
    
    156.2Obligations under capital leases due 2006  2022 (6.85 %  7.65 %)
    
    US$
    
    
    320.8
    
    
    
    335.3Obligations under capital leases due 2006 (7.88 %  10.93 %)
    
    CDN$
    
    
    0.3
    
    
    
    0.9Bank loan payable on demand due 2010 (5.883 %)
    
    CDN$
    
    
    4.5
    
    
    
    4.3Other
    
    US$
    
    
    0.2
    
    
    
    0.42,957.1
    
    
    
    3,304.8Perpetual 4 % Consolidated Debenture Stock
    
    US$
    
    
    35.6
    
    
    
    36.8Perpetual 4 % Consolidated Debenture Stock
    
    GB£
    
    
    8.1
    
    
    
    9.43,000.8
    
    
    
    3,351.0Less: Long-term debt maturing within one year
    
    
    
    
    
    
    30.0
    
    
    
    275.7$
    2,970.8
    
    
    $
    3,075.3
 64




---



##### 



65




---



##### 



Capital(in millions)
    
    Year
    
    
    leasesMinimum lease payments in:
    
    
    2006
    
    
    $
    28.82007
    
    
    
    29.82008
    
    
    
    29.82009
    
    
    
    31.32010
    
    
    
    46.1Thereafter
    
    
    
    384.5Total minimum lease payments
    
    
    
    
    
    
    550.3Less: Imputed interest
    
    
    
    
    
    
    229.2Present value of minimum lease payments
    
    
    
    
    
    
    321.1Less: Current portion
    
    
    
    
    
    
    6.5Long-term portion of capital lease obligations
    
    
    
    
    
    $
    314.6
  18. Financial Instruments
 Foreign Exchange Forward Contracts
  Commodity Contracts
  66




---



##### 



Interest Rate Contracts
    Expiration
    
    October 15, 2011Notional amount of principal (in CDN$ millions)
    
    $
    232.6Fixed receiving rate
    
    
    6.250
    %Variable paying rate(1)
    
    
    4.9
    %
 (1) Based on U.S. three-month LIBOR.
   Credit Risk Management
  67




---



##### 



Interest Rate Exposure and Fair Values
  2005
    
    
    
    
    
    Fixed interest rate maturing inAt floating
    
    
    
    
    
    
    2007
    
    
    2011
    
    
    Total carrying(in millions)
    
    interest rates
    
    
    2006
    
    
    to 2010
    
    
    and after
    
    
    value
    
    
    Fair valueFinancial assetsCash and short-term investments
    
    $
    121.8
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    121.8
    
    
    $
    121.8Financial liabilities6.250 % Notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    465.2
    
    
    
    465.2
    
    
    
    494.17.125 % Debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    407.1
    
    
    
    407.1
    
    
    
    488.79.450 % Debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    290.7
    
    
    
    290.7
    
    
    
    397.65.750 % Debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    290.7
    
    
    
    290.7
    
    
    
    303.04.90 % Medium Term Notes due 2010
    
    
    
    
    
    
    
    
    
    
    350.0
    
    
    
    
    
    
    
    350.0
    
    
    
    357.25.41 % Senior Secured Notes due 2024
    
    
    
    
    
    
    3.6
    
    
    
    16.5
    
    
    
    143.5
    
    
    
    163.6
    
    
    
    165.76.91 % Secured Equipment Notes
    
    
    
    
    
    
    6.1
    
    
    
    29.1
    
    
    
    194.1
    
    
    
    229.3
    
    
    
    268.87.49 % Equipment Trust Certificates
    
    
    
    
    
    
    2.9
    
    
    
    13.8
    
    
    
    120.9
    
    
    
    137.6
    
    
    
    163.5Secured Equipment Loan due 2007
    
    
    143.1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    143.1
    
    
    
    143.1Secured Equipment Loan due 2015
    
    
    154.0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    154.0
    
    
    
    154.04 % Consolidated Debenture Stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43.7
    
    
    
    43.7
    
    
    
    38.8Obligations under capital leases
    
    
    
    
    
    
    6.5
    
    
    
    51.8
    
    
    
    262.8
    
    
    
    321.1
    
    
    
    369.6Bank loan payable on demand
    
    
    
    
    
    
    4.5
    
    
    
    
    
    
    
    
    
    
    
    4.5
    
    
    
    4.5Other
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    0.2Foreign exchange forward contracts
on future revenue streams
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.5Crude oil swaps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59.2Foreign exchange forward contracts on fuel
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7.2
    )Interest rate swaps
    
    
    232.6
    
    
    
    
    
    
    
    
    
    
    
    (232.6
    )
    
    
    
    
    
    
    (0.2
    )Total financial liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,000.8
    
    
    $
    3,403.1
 68




---



##### 



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 swaps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
   
    
    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, 2005 and 2004. 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, 2005 and 2004, which generally
reflects the estimated amount the Company would receive or pay to terminate the contracts
at the applicable Consolidated Balance Sheet date.
 69




---



##### 



19. Deferred Liabilities
 (in millions)
    
    2005
    
    
    2004Provision for restructuring and environmental remediation (Note 21)
    
    $
    398.8
    
    
    $
    448.7Deferred workers compensation and personal injury accruals
    
    
    162.8
    
    
    
    177.1Accrued employee benefits
    
    
    177.8
    
    
    
    151.0Asset retirement obligations (Note 20)
    
    
    32.9
    
    
    
    32.4Fibre optics rights-of-way deferred revenue
    
    
    45.1
    
    
    
    48.8Stock-based compensation liabilities
    
    
    46.4
    
    
    
    29.2Other
    
    
    70.8
    
    
    
    63.0934.6
    
    
    
    950.2Less: Amount payable/realizable within one year
    
    
    191.1
    
    
    
    182.4Total deferred liabilities
    
    $
    743.5
    
    
    $
    767.8
  20. Asset Retirement Obligations
  Canada Transportation Act
  21. Restructuring Accrual and Environmental Remediation
  70




---



##### 



Foreign
    
    
    ClosingOpening balance
    
    
    
    
    
    
    
    
    
    
    Amortization
    
    
    exchange
    
    
    balance(in millions)
    
    Jan. 1
    
    
    Accrued
    
    
    Payments
    
    
    of discount(1)
    
    
    impact
    
    
    Dec. 31Year ended December 31, 2005Labour liability for terminations
and severances
    
    $
    269.7
    
    
    $
    33.6
    
    
    $
    (50.5
    )
    
    $
    12.0
    
    
    $
    (1.2
    )
    
    $
    263.6Other non-labour liabilities for exit plans
    
    
    6.1
    
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    0.1
    
    
    
    (0.2
    )
    
    
    5.8Total restructuring liability
    
    
    275.8
    
    
    
    33.5
    
    
    
    (50.6
    )
    
    
    12.1
    
    
    
    (1.4
    )
    
    
    269.4Environmental remediation program
    
    
    172.9
    
    
    
    (22.4
    )
    
    
    (18.4
    )
    
    
    
    
    
    
    (2.7
    )
    
    
    129.4Total restructuring and environmental
remediation liability
    
    $
    448.7
    
    
    $
    11.1
    
    
    $
    (69.0
    )
    
    $
    12.1
    
    
    $
    (4.1
    )
    
    $
    398.8Year ended December 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
    )
    
    $
    448.7Year ended December 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)
    
    Amortization of Discount is charged to income as Compensation and Benefits
(2005  $0.7 million; 2004  nil; 2003  nil), Purchased Services and Other (2005  $2.3 million;
2004  $4.9 million; 2003  nil) and Other Charges (2005  $9.2 million; 2004  $11.7 million;
2003  $13.0 million), as applicable.
   71




---



##### 



22. Shareholders Equity
 Authorized and Issued Share Capital
   2005
    
    
    2004(in millions)
    
    Number
    
    
    Amount
    
    
    Number
    
    
    AmountShare capital, January 1
    
    
    158.8
    
    
    $
    1,120.6
    
    
    
    158.7
    
    
    $
    1,118.1Shares issued under stock option plans
    
    
    1.2
    
    
    
    33.4
    
    
    
    0.1
    
    
    
    2.5Shares repurchased
    
    
    (1.8
    )
    
    
    (12.5
    )
    
    
    
    
    
    
    Share capital, December 31
    
    
    158.2
    
    
    $
    1,141.5
    
    
    
    158.8
    
    
    $
    1,120.6
  72




---



##### 



Contributed Surplus
  (in millions)
    
    2005
    
    
    2004Contributed surplus, January 1
    
    $
    300.4
    
    
    $
    294.6Stock-based compensation related to stock options issued
    
    
    9.3
    
    
    
    5.8Shares repurchased
    
    
    (68.1
    )
    
    
    Contributed surplus, December 31
    
    $
    241.6
    
    
    $
    300.4
   Foreign Currency Translation Adjustments
  (in millions)
    
    2005
    
    
    2004Balance, January 1
    
    $
    77.0
    
    
    $
    88.0Change in foreign currency translation rates on foreign subsidiaries
    
    
    (19.1
    )
    
    
    (50.6
    )Balance, December 31, before designated hedge
    
    
    57.9
    
    
    
    37.4Designated hedge, net of tax
    
    
    9.6
    
    
    
    39.6Balance, December 31, including designated hedge
    
    $
    67.5
    
    
    $
    77.0
  73




---



##### 



23. Pensions and Other Benefits
     Pensions
    
    
    Other benefits(in millions)
    
    2005
    
    
    2004
    
    
    2003
    
    
    2005
    
    
    2004
    
    
    2003Current service cost (benefits earned
by employees in the year)
    
    $
    75.7
    
    
    $
    71.7
    
    
    $
    64.4
    
    
    $
    13.8
    
    
    $
    13.0
    
    
    $
    15.3Interest cost on benefit obligation
    
    
    405.0
    
    
    
    400.0
    
    
    
    395.0
    
    
    
    27.3
    
    
    
    27.5
    
    
    
    26.7Actual return on fund assets
    
    
    (849.8
    )
    
    
    (610.9
    )
    
    
    (604.7
    )
    
    
    (0.7
    )
    
    
    (1.1
    )
    
    
    Actuarial loss
    
    
    693.7
    (1)
    
    
    168.1
    
    
    
    403.7
    
    
    
    29.8
    
    
    
    18.8
    
    
    
    19.6Plan amendments
    
    
    56.5
    
    
    
    
    
    
    
    14.2
    
    
    
    (6.7
    )
    
    
    1.6
    
    
    
    (2.6
    )Elements of employee future
benefit cost, before adjustments
to recognize the long-term nature
of employee future benefit costs
    
    
    381.1
    
    
    
    28.9
    
    
    
    272.6
    
    
    
    63.5
    
    
    
    59.8
    
    
    
    59.0Adjustments to recognize the long-term
nature of employee future benefit costs:Amortization of transitional (asset) obligation
    
    
    (16.2
    )
    
    
    (16.2
    )
    
    
    (15.6
    )
    
    
    12.7
    
    
    
    12.8
    
    
    
    13.4Difference between expected return and
actual return on fund assets
    
    
    351.2
    
    
    
    129.9
    
    
    
    156.1
    
    
    
    
    
    
    
    
    
    
    
    Difference between actuarial loss
recognized and actual actuarial loss
on benefit obligation
    
    
    (638.1
    )
    
    
    (128.6
    )
    
    
    (399.5
    )
    
    
    (25.6
    )
    
    
    (15.4
    )
    
    
    (21.9
    )Difference between amortization of prior
service costs and actual plan amendments
    
    
    (41.3
    )
    
    
    11.1
    
    
    
    (4.4
    )
    
    
    6.7
    
    
    
    (1.6
    )
    
    
    2.6Net benefit cost
    
    $
    36.7
    
    
    $
    25.1
    
    
    $
    9.2
    
    
    $
    57.3
    
    
    $
    55.6
    
    
    $
    53.1
 (1)
    
    Actuarial loss is largely a result of a decrease in the discount rate.
 74




---



##### 



Pensions
    
    
    Other benefits(in millions)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Change in benefit obligation:Benefit obligation at January 1
    
    $
    6,827.0
    
    
    $
    6,525.3
    
    
    $
    469.4
    
    
    $
    450.4Current service cost
    
    
    75.7
    
    
    
    71.7
    
    
    
    13.8
    
    
    
    13.0Interest cost
    
    
    405.0
    
    
    
    400.0
    
    
    
    27.3
    
    
    
    27.5Employee contributions
    
    
    56.7
    
    
    
    45.7
    
    
    
    
    
    
    
    Benefits paid
    
    
    (377.3
    )
    
    
    (372.5
    )
    
    
    (32.5
    )
    
    
    (32.2
    )Foreign currency changes
    
    
    (5.1
    )
    
    
    (11.3
    )
    
    
    (2.2
    )
    
    
    (5.4
    )Plan amendments
    
    
    56.5
    
    
    
    
    
    
    
    (6.7
    )
    
    
    1.6Change in provincial Workers Compensation Board account
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4.3
    )Actuarial loss
    
    
    693.7
    
    
    
    168.1
    
    
    
    29.8
    
    
    
    18.8Benefit obligation at December 31
    
    $
    7,732.2
    
    
    $
    6,827.0
    
    
    $
    498.9
    
    
    $
    469.4Change in fund assets:Fair value of fund assets at January 1
    
    $
    6,222.7
    
    
    $
    5,771.6
    
    
    $
    12.1
    
    
    $
    17.2Actual return on fund assets
    
    
    849.8
    
    
    
    610.9
    
    
    
    0.7
    
    
    
    1.1Employer contributions
    
    
    141.7
    
    
    
    175.7
    
    
    
    31.6
    
    
    
    30.3Employee contributions
    
    
    56.7
    
    
    
    45.7
    
    
    
    
    
    
    
    Benefits paid
    
    
    (377.3
    )
    
    
    (372.5
    )
    
    
    (32.5
    )
    
    
    (32.2
    )Change in provincial Workers Compensation Board account
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4.3
    )Foreign currency changes
    
    
    (3.5
    )
    
    
    (8.7
    )
    
    
    
    
    
    
    Fair value of fund assets at December 31
    
    $
    6,890.1
    
    
    $
    6,222.7
    
    
    $
    11.9
    
    
    $
    12.1Funded status  plan deficit
    
    $
    (842.1
    )
    
    $
    (604.3
    )
    
    $
    (487.0
    )
    
    $
    (457.3
    )Unamortized prior service cost
    
    
    141.4
    
    
    
    100.1
    
    
    
    
    
    
    
    1.6Unamortized net transitional (asset) obligation
    
    
    (112.7
    )
    
    
    (128.9
    )
    
    
    86.5
    
    
    
    104.3Unamortized experience losses:Deferred investment losses due to use of market-related
value to determine net benefit cost
    
    
    (200.1
    )
    
    
    135.1
    
    
    
    
    
    
    
    Unamortized net actuarial loss
    
    
    1,959.1
    (1)
    
    
    1,338.6
    (1)
    
    
    127.9
    
    
    
    103.0Accrued benefit asset (liability) on the Consolidated Balance Sheet
    
    $
    945.6
    
    
    $
    840.6
    
    
    $
    (272.6
    )
    
    $
    (248.4
    )
 (1)
    
    The amount by which these losses exceed the 10 % corridor (representing 10 % of
the benefit obligation) was equal to $1,185.9 million at December 31, 2005 (2004  $655.9 million).
Any such excess is amortized, commencing in the following year, over the expected average remaining
service period of active employees expected to receive benefits under the plan (approximately 12
years). In 2005, $55.6 million was amortized and included in the net benefit cost (2004  $39.5
million).
 75




---



##### 



Pensions
    
    
    Other benefits(in millions)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Accounts receivable and other current assets
    
    $
    2.5
    
    
    $
    4.5
    
    
    $
    
    
    
    $
    Other assets and deferred charges
    
    
    944.8
    
    
    
    838.3
    
    
    
    
    
    
    
    Accounts payable and accrued liabilities
    
    
    (0.7
    )
    
    
    (0.3
    )
    
    
    (18.6
    )
    
    
    (18.7
    )Other long-term liabilities
    
    
    (1.0
    )
    
    
    (1.9
    )
    
    
    (254.0
    )
    
    
    (229.7
    )Accrued benefit asset (liability) on the Consolidated Balance Sheet
    
    $
    945.6
    
    
    $
    840.6
    
    
    $
    (272.6
    )
    
    $
    (248.4
    )
   Pensions
    
    
    Other benefits(in millions)
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Benefit obligation
    
    $
    (7,732.2
    )
    
    $
    (6,827.0
    )
    
    $
    (498.9
    )
    
    $
    (469.4
    )Fair value of fund assets
    
    
    6,890.1
    
    
    
    6,222.7
    
    
    
    11.9
    
    
    
    12.1$
    (842.1
    )
    
    $
    (604.3
    )
    
    $
    (487.0
    )
    
    $
    (457.3
    )
  (percentage)
    
    2005
    
    
    2004
    
    
    2003Benefit obligation at December 31:Discount rate
    
    
    5.25
    
    
    
    6.00
    
    
    
    6.25Projected future salary increases
    
    
    3.00
    
    
    
    3.00
    
    
    
    3.00Health care cost trend rate
    
    
    10.00
    (1)
    
    
    8.50
    (2)
    
    
    9.00
    (2)Benefit cost for year ended December 31:Discount rate
    
    
    6.00
    
    
    
    6.25
    
    
    
    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
    
    
    8.50
    (1)
    
    
    9.00
    (2)
    
    
    6.90
    (3)
 (1)
    
    Beginning in 2008, the health care cost trend rate is projected to decrease by 0.5 %
per year to approximately 5.0 % per year in 2017.(2)
    
    For these prior periods or measurement dates, the health care cost trend rate was
projected to decrease by 0.5 % per year to approximately 4.5 % per year in 2012.(3)
    
    For this prior period, the health care cost trend rate was projected to decrease by
0.6 % per year to approximately 4.5 % per year in 2007.
 76




---



##### 



One percentage
    
    
    One percentage(in millions)
    
    point increase
    
    
    point decreaseEffect on the total of service and interest costs(1)
    
    $
    (0.9
    )
    
    $
    0.8Effect on post-retirement benefit obligation(1)
    
    $
    (10.6
    )
    
    $
    10.0
 (1)

    
    Favourable (unfavourable).
 Plan Assets
  Percentage of planCurrent permissible
    
    
    assets at December 31Asset allocation (percentage)
    
    range
    
    
    2005
    
    
    2004Equity securities
    
    
    51  57
    
    
    
    55.5
    
    
    
    55.1Debt securities
    
    
    37  43
    
    
    
    40.3
    
    
    
    40.7Real estate and other
    
    
    4  8
    
    
    
    4.2
    
    
    
    4.2Total
    
    
    
    
    
    
    100.0
    
    
    
    100.0
   Cash Flows
  Defined Contribution Plan
  77




---



##### 



Post-employment Restructuring Benefits
  (in millions)
    
    2005
    
    
    2004Change in liability:Restructuring labour liability at January 1
    
    $
    219.7
    
    
    $
    297.3Plan adjustment
    
    
    33.6
    
    
    
    (17.4
    )Settlement gain
    
    
    
    
    
    
    (19.0
    )Interest cost
    
    
    13.3
    
    
    
    17.1Benefits paid
    
    
    (40.5
    )
    
    
    (52.2
    )Foreign currency changes
    
    
    (1.3
    )
    
    
    (6.1
    )Restructuring labour liability at December 31
    
    
    224.8
    
    
    
    219.7Unfunded restructuring labour amount
    
    
    (224.8
    )
    
    
    (219.7
    )Unamortized net transitional amount
    
    
    (38.8
    )
    
    
    (50.0
    )Accrued restructuring labour liability on the Consolidated Balance Sheet
    
    $
    (263.6
    )
    
    $
    (269.7
    )
 24. Stock-based Compensation
  Replacement Options and SARs
    Stock Option Plans and SARs
  78




---



##### 



2005
    
    
    2004Weighted
    
    
    
    
    
    
    WeightedNumber of
    
    
    average
    
    
    Number of
    
    
    averageoptions
    
    
    exercise price
    
    
    options
    
    
    exercise priceOutstanding, January 1
    
    
    7,752,080
    
    
    $
    29.32
    
    
    
    6,226,674
    
    
    $
    28.20New options granted
    
    
    1,556,400
    
    
    
    42.09
    
    
    
    1,741,400
    
    
    
    32.50Exercised
    
    
    (1,157,752
    )
    
    
    27.48
    
    
    
    (131,450
    )
    
    
    19.33Forfeited/cancelled
    
    
    (178,811
    )
    
    
    29.80
    
    
    
    (83,494
    )
    
    
    28.63Expired
    
    
    
    
    
    
    
    
    
    
    (1,050
    )
    
    
    9.83Outstanding, December 31
    
    
    7,971,917
    
    
    $
    32.07
    
    
    
    7,752,080
    
    
    $
    29.32Options exercisable at December 31
    
    
    3,162,807
    
    
    $
    27.37
    
    
    
    1,422,398
    
    
    $
    24.60
  Options outstanding
    
    
    Options exercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber of
    
    
    average years
    
    
    average
    
    
    Number of
    
    
    averageRange of exercise prices
    
    options
    
    
    to expiration
    
    
    exercise price
    
    
    options
    
    
    exercise price$14.07  $18.96
    
    
    387,387
    
    
    
    3
    
    
    $
    15.14
    
    
    
    387,387
    
    
    $
    15.14$27.62  $36.64
    
    
    6,040,830
    
    
    
    4
    
    
    
    30.59
    
    
    
    2,775,420
    
    
    
    29.07$42.05  $50.04
    
    
    1,543,700
    
    
    
    7
    
    
    
    42.09
    
    
    
    
    
    
    
    Total
    
    
    7,971,917
    
    
    
    5
    
    
    $
    32.07
    
    
    
    3,162,807
    
    
    $
    27.37
 79




---



##### 



Deferred Share Unit Plan and Other
     Employee Share Purchase Plan
   Additional Fair Value Disclosure
  2005
    
    
    2004
    
    
    2003Net income (in millions)
    
    As reported
    
    $
    542.9
    
    
    $
    413.0
    
    
    $
    401.3Pro forma
    
    $
    542.5
    
    
    $
    411.0
    
    
    $
    399.2Basic earnings per share (in dollars)
    
    As reported
    
    $
    3.43
    
    
    $
    2.60
    
    
    $
    2.53Pro forma
    
    $
    3.43
    
    
    $
    2.59
    
    
    $
    2.52Diluted earnings per share (in dollars)
    
    As reported
    
    $
    3.39
    
    
    $
    2.60
    
    
    $
    2.52Pro forma
    
    $
    3.39
    
    
    $
    2.58
    
    
    $
    2.51
 80




---



##### 



2005
    
    
    2004
    
    
    2003Expected option life (years)
    
    
    4.50
    
    
    
    4.50
    
    
    
    4.41Risk-free interest rate
    
    
    3.49
    %
    
    
    3.36
    %
    
    
    4.14
    %Expected stock price volatility
    
    
    24
    %
    
    
    28
    %
    
    
    30
    %Expected annual dividends per share
    
    $
    0.53
    
    
    $
    0.50
    
    
    $
    0.50Weighted average fair value of
options granted during the year
    
    $
    9.66
    
    
    $
    8.04
    
    
    $
    8.49
 25. Commitments and Contingencies
   
  Guarantees
  
    
    residual value guarantees on operating lease commitments of $320.4 million at
December 31, 2005;
    
    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.
  81




---



##### 



Indemnifications
   26. Segmented Information
 Operating Segment
   Geographic Information
 (in millions)
    
    Canada
    
    
    United States
    
    
    Total2005Revenues
    
    $
    3,404.1
    
    
    $
    987.5
    
    
    $
    4,391.6Net properties
    
    $
    7,252.2
    
    
    $
    1,538.7
    
    
    $
    8,790.92004Revenues
    
    $
    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
    
    $
    6,603.6
    
    
    $
    1,616.0
    
    
    $
    8,219.6
  82




---



##### 



Consolidating Information  2005
 Other
    
    
    Consolidating(in millions)
    
    Canada
    
    
    United States
    
    
    countries
    
    
    entries
    
    
    TotalRevenues
    
    $
    3,397.9
    
    
    $
    987.5
    
    
    $
    
    
    
    $
    6.2
    
    
    $
    4,391.6Operating expenses
    
    
    2,731.3
    
    
    
    778.9
    
    
    
    
    
    
    
    (109.7
    )
    
    
    3,400.5Operating income
    
    
    666.6
    
    
    
    208.6
    
    
    
    
    
    
    
    115.9
    
    
    
    991.1Interest and other charges
    
    
    194.9
    
    
    
    42.6
    
    
    
    (22.1
    )
    
    
    6.9
    
    
    
    222.3Foreign exchange (gain) loss on
long-term debt
    
    
    (53.8
    )
    
    
    
    
    
    
    13.7
    
    
    
    (4.6
    )
    
    
    (44.7
    )Income taxes
    
    
    165.8
    
    
    
    65.0
    
    
    
    0.7
    
    
    
    39.1
    
    
    
    270.6Net income
    
    $
    359.7
    
    
    $
    101.0
    
    
    $
    7.7
    
    
    $
    74.5
    
    
    $
    542.9Current assets
    
    $
    686.5
    
    
    $
    263.8
    
    
    $
    5.0
    
    
    $
    (61.4
    )
    
    $
    893.9Net properties
    
    
    5,514.9
    
    
    
    1,533.6
    
    
    
    
    
    
    
    1,742.4
    
    
    
    8,790.9Other long-term assets
    
    
    1,141.8
    
    
    
    85.8
    
    
    
    401.9
    
    
    
    (423.2
    )
    
    
    1,206.3Total assets
    
    $
    7,343.2
    
    
    $
    1,883.2
    
    
    $
    406.9
    
    
    $
    1,257.8
    
    
    $
    10,891.1Current liabilities
    
    $
    881.2
    
    
    $
    300.0
    
    
    $
    0.4
    
    
    $
    (64.9
    )
    
    $
    1,116.7Long-term liabilities
    
    
    4,268.9
    
    
    
    1,004.0
    
    
    
    
    
    
    
    115.8
    
    
    
    5,388.7Shareholders equity
    
    
    2,193.1
    
    
    
    579.2
    
    
    
    406.5
    
    
    
    1,206.9
    
    
    
    4,385.7Total liabilities and shareholders
equity
    
    $
    7,343.2
    
    
    $
    1,883.2
    
    
    $
    406.9
    
    
    $
    1,257.8
    
    
    $
    10,891.1
 83




---



##### 



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
 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
 84




---



##### 



27. Reclassification
  28. Supplementary Data
 Reconciliation of Canadian and United States Generally Accepted Accounting Principles
  Accounting for Derivative Instruments and Hedging
  Pensions and Post-retirement Benefits
   Post-employment Benefits
  85




---



##### 



Termination and Severance Benefits
  Stock-based Compensation
  Internal Use Software
  Capitalization of Interest
  Comprehensive Income
  Variable-interest-entity (conditional sales agreements)
  Joint Venture
  86




---



##### 



Additional Minimum Pension Liability
  Offsetting Contracts
  Asset Retirement Obligations
  Future Accounting Changes
  Statement of Cash Flows
  87




---



##### 



Comparative Income Statement
  (in millions)
    
    2005
    
    
    2004
    
    
    2003Net income  Canadian GAAP
    
    $
    542.9
    
    
    $
    413.0
    
    
    $
    401.3Increased (decreased) by:Pension costs
    
    
    7.7
    
    
    
    (0.3
    )
    
    
    (44.2
    )Post-retirement benefits
    
    
    9.2
    
    
    
    8.6
    
    
    
    8.6Post-employment benefits
    
    
    (4.0
    )
    
    
    (0.3
    )
    
    
    (6.2
    )Termination and severance benefits
    
    
    (9.4
    )
    
    
    (9.1
    )
    
    
    (10.3
    )Internal use software  additions
    
    
    (9.8
    )
    
    
    (6.4
    )
    
    
    (9.9
    )Internal use software  depreciation
    
    
    6.1
    
    
    
    5.4
    
    
    
    4.4Conditional sales agreements
    
    
    
    
    
    
    
    
    
    
    0.8Stock-based compensation
    
    
    (3.3
    )
    
    
    (1.8
    )
    
    
    (4.2
    )(Loss) gain on ineffective portion of hedges
    
    
    (6.6
    )
    
    
    (16.1
    )
    
    
    25.4Capitalized interest  additions
    
    
    4.4
    
    
    
    4.2
    
    
    
    5.1Capitalized interest  depreciation
    
    
    (3.9
    )
    
    
    (3.7
    )
    
    
    (3.6
    )Future (deferred) income tax recovery on the above items
    
    
    1.7
    
    
    
    6.7
    
    
    
    14.2Income, before cumulative catch-up adjustment  U.S. GAAP
    
    
    535.0
    
    
    
    400.2
    
    
    
    381.4Cumulative catch-up adjustment on adoption of FASB 143, net of tax of $8.1
million
    
    
    
    
    
    
    
    
    
    
    (23.5
    )Net income  U.S. GAAP
    
    $
    535.0
    
    
    $
    400.2
    
    
    $
    357.9Other comprehensive income:Unrealized foreign exchange loss on net investment
in self-sustaining U.S. subsidiaries
    
    
    (19.1
    )
    
    
    (50.6
    )
    
    
    (188.6
    )Unrealized foreign exchange gain on designated net investment hedge
    
    
    16.5
    
    
    
    49.5
    
    
    
    181.8Minimum pension liability adjustment
    
    
    (254.3
    )
    
    
    20.8
    
    
    
    (177.7
    )Change in fair value of derivative instruments
    
    
    86.5
    
    
    
    39.5
    
    
    
    13.6Gain on derivative instruments realized in net income
    
    
    (55.9
    )
    
    
    (26.0
    )
    
    
    (4.2
    )Future (deferred) income tax recovery (expense) on the above items
    
    
    74.5
    
    
    
    (31.8
    )
    
    
    20.8Comprehensive income
    
    $
    383.2
    
    
    $
    401.6
    
    
    $
    203.6Earnings per share  U.S. GAAPBasic earnings per share
    
    $
    3.38
    
    
    $
    2.52
    
    
    $
    2.26Diluted earnings per share
    
    $
    3.34
    
    
    $
    2.51
    
    
    $
    2.25Basic earnings per share, before cumulative catch-up adjustment
    
    $
    3.38
    
    
    $
    2.52
    
    
    $
    2.41Diluted earnings per share, before cumulative catch-up adjustment
    
    $
    3.34
    
    
    $
    2.51
    
    
    $
    2.40
 88




---



##### 



(in millions)
    
    2005
    
    
    2004
    
    
    2003Operating incomeCanadian GAAP
    
    $
    991.1
    
    
    $
    716.6
    
    
    $
    485.6U.S. GAAP
    
    $
    981.5
    
    
    $
    697.1
    
    
    $
    419.9
  Consolidated Balance Sheet
 
 (in millions)
    
    2005
    
    
    2004AssetsCurrent assetsCashInvestment in joint ventures
    
    $
    (0.1
    )
    
    $
    Accounts receivable and other current assetsInvestment in joint ventures
    
    
    0.7
    
    
    
    InvestmentsInvestment in joint ventures
    
    
    41.9
    
    
    
    Long-term assetsPropertiesCapitalized interest
    
    
    150.2
    
    
    
    149.7Internal use software
    
    
    (49.1
    )
    
    
    (45.4
    )Investment in joint ventures
    
    
    (35.9
    )
    
    
    Other assets and deferred chargesPension
    
    
    (205.8
    )
    
    
    (213.5
    )Minimum pension liability adjustment
    
    
    (525.7
    )
    
    
    (443.2
    )Long-term receivable (FIN 39)
    
    
    169.2
    
    
    
    159.6Derivative instruments
    
    
    61.7
    
    
    
    42.9Investment in joint ventures
    
    
    (9.9
    )
    
    
    Total assets
    
    $
    (402.8
    )
    
    $
    (349.9
    )
 89




---



##### 



Consolidated
Balance Sheet
 (in millions)
    
    2005
    
    
    2004Liabilities and shareholders equityCurrent liabilitiesAccounts payable and accrued liabilitiesInvestment in joint ventures
    
    $
    (1.1
    )
    
    $
    Income and other taxes payableInvestment in joint ventures
    
    
    (0.1
    )
    
    
    Long-term liabilitiesDeferred liabilitiesTermination and severance benefits
    
    
    (27.2
    )
    
    
    (36.6
    )Post-retirement benefit liability
    
    
    43.3
    
    
    
    52.5Post-employment benefit liability
    
    
    23.1
    
    
    
    19.1Minimum pension liability adjustment
    
    
    297.3
    
    
    
    125.5Derivative instruments
    
    
    6.0
    
    
    
    7.0Investment in joint ventures
    
    
    (2.2
    )
    
    
    Long-term debtMarked-to-market hedged portion of debt
    
    
    (0.2
    )
    
    
    8.8Bank loan (FIN 39)
    
    
    169.2
    
    
    
    159.6Future (deferred) income tax liability
    
    
    (279.2
    )
    
    
    (201.1
    )Total liabilities
    
    
    228.9
    
    
    
    134.8Shareholders
equityShare capitalStock-based compensation
    
    
    11.5
    
    
    
    8.9Contributed surplusStock-based compensation
    
    
    13.0
    
    
    
    12.3Foreign currency translation adjustments
    
    
    (67.5
    )
    
    
    (77.0
    )Retained income
    
    
    (106.3
    )
    
    
    (98.4
    )Accumulated other comprehensive incomeForeign currency translation adjustments
    
    
    10.3
    
    
    
    15.9Minimum pension liability adjustment
    
    
    (527.5
    )
    
    
    (361.6
    )Derivative instruments (FASB 133)
    
    
    34.8
    
    
    
    15.2Total liabilities and shareholders equity
    
    $
    (402.8
    )
    
    $
    (349.9
    )
 90




---



##### 



FIVE-YEAR SUMMARY
 (in millions)
    
    2005
    
    
    2004
    
    
    2003(1)
    
    
    2002(1)
    
    
    2001(1)Income StatementRevenuesFreightGrain
    
    $
    754.5
    
    
    $
    668.2
    
    
    $
    644.4
    
    
    $
    631.4
    
    
    $
    749.3Coal
    
    
    728.8
    
    
    
    530.3
    
    
    
    444.0
    
    
    
    442.5
    
    
    
    474.1Sulphur and fertilizers
    
    
    447.1
    
    
    
    460.0
    
    
    
    417.4
    
    
    
    401.3
    
    
    
    380.7Forest products
    
    
    333.9
    
    
    
    322.0
    
    
    
    328.8
    
    
    
    360.3
    
    
    
    354.4Industrial and consumer products (2)
    
    
    542.9
    
    
    
    481.4
    
    
    
    459.9
    
    
    
    485.2
    
    
    
    496.4Intermodal (2)
    
    
    1,161.1
    
    
    
    1,034.7
    
    
    
    926.4
    
    
    
    855.4
    
    
    
    773.7Automotive
    
    
    298.0
    
    
    
    288.5
    
    
    
    304.2
    
    
    
    332.4
    
    
    
    303.94,266.3
    
    
    
    3,785.1
    
    
    
    3,525.1
    
    
    
    3,508.5
    
    
    
    3,532.5Other (2) (3) (5)
    
    
    125.3
    
    
    
    117.8
    
    
    
    135.6
    
    
    
    157.1
    
    
    
    166.1Total revenues (3) (5)
    
    
    4,391.6
    
    
    
    3,902.9
    
    
    
    3,660.7
    
    
    
    3,665.6
    
    
    
    3,698.6Operating expensesCompensation and benefits
    
    
    1,322.2
    
    
    
    1,259.6
    
    
    
    1,163.9
    
    
    
    1,143.4
    
    
    
    1,133.0Fuel
    
    
    588.0
    
    
    
    440.0
    
    
    
    393.6
    
    
    
    358.3
    
    
    
    403.5Materials
    
    
    203.3
    
    
    
    178.5
    
    
    
    179.2
    
    
    
    168.7
    
    
    
    182.5Equipment rents
    
    
    210.0
    
    
    
    218.5
    
    
    
    238.5
    
    
    
    255.4
    
    
    
    275.0Depreciation
    
    
    445.1
    
    
    
    407.1
    
    
    
    372.3
    
    
    
    340.2
    
    
    
    326.4Purchased services and other
    
    
    621.6
    
    
    
    610.7
    
    
    
    583.6
    
    
    
    555.6
    
    
    
    550.1Total operating expenses, before other specified items (3) (5)
    
    
    3,390.2
    
    
    
    3,114.4
    
    
    
    2,931.1
    
    
    
    2,821.6
    
    
    
    2,870.5Operating income, before other specified items (3) (5)
    
    
    1,001.4
    
    
    
    788.5
    
    
    
    729.6
    
    
    
    844.0
    
    
    
    828.1Other charges, before foreign exchange gains and losses
on long-term debt and other specified items (3) (4) (5)
    
    
    18.1
    
    
    
    36.1
    
    
    
    33.5
    
    
    
    21.8
    
    
    
    26.4Interest expense
    
    
    204.2
    
    
    
    218.6
    
    
    
    218.7
    
    
    
    242.2
    
    
    
    209.6Income tax expense, before foreign exchange gains
and losses on long-term debt and income tax
on other specified items (3) (4) (5)
    
    
    250.8
    
    
    
    172.4
    
    
    
    147.3
    
    
    
    181.2
    
    
    
    223.3Income, before foreign exchange gains and losses
on long-term debt and other specified items (3) (4) (5)
    
    
    528.3
    
    
    
    361.4
    
    
    
    330.1
    
    
    
    398.8
    
    
    
    368.8Foreign exchange gain (loss) on long-term debt
(net of income tax) (4)
    
    
    22.3
    
    
    
    94.4
    
    
    
    224.4
    
    
    
    16.7
    
    
    
    (48.2
    )Other specified items (net of income tax) (3)
    
    
    (7.7
    )
    
    
    (42.8
    )
    
    
    (153.2
    )
    
    
    72.0
    
    
    
    40.4Net income
    
    $
    542.9
    
    
    $
    413.0
    
    
    $
    401.3
    
    
    $
    487.5
    
    
    $
    361.0
 91




---



##### 



(1)
    
    Restated. Effective January 1, 2004, CPR adopted retroactively with restatement the
Canadian Institute of Chartered Accountants new accounting standard for asset retirement
obligations.(2)
    
    In 2005, CPR reclassified from Other revenue certain intermodal-related revenue
items consisting of container storage revenue and terminal service fees as part of the intermodal
line of business. Also, items relating to food and consumer products have been reclassified to the
renamed industrial and consumer products group from the intermodal group.(3)
    
    Before other specified items as follows: for 2005, a $33.9-million ($20.6 million
after tax) reduction to environmental remediation and a $44.2-million ($28.3 million after tax)
special charge for labour restructuring; for 2004, a $19.0-million ($12.4 million after tax)
reduction of a labour restructuring liability and a $90.9-million ($55.2 million after tax) special
charge for environmental remediation; for 2003, a $215.1-million ($141.4 million after tax) special
charge for labour restructuring and asset impairment, a $28.9-million ($18.4 million after tax) for
a loss on transfer of assets to an outsourcing firm, a $59.3-million favourable adjustment related
to the revaluation of future income taxes, and an unfavourable impact of $52.7 million for an
increase in future income taxes resulting from the repeal of previously legislated income tax
reductions; for 2002, $72.0 million in income tax recoveries associated with a favourable court
ruling related to prior years taxes; and for 2001, $24.5 million ($13.9 million after tax) in
spin-off related and incentive compensation charges, $17.2 million ($9.7 million after tax) in
bridge financing fees related to the spin-off, and $64.0 million in income tax rate recoveries.(4)
    
    Before foreign exchange gain (loss) on long-term debt as follows: for 2005, a
$44.7-million ($22.3 million after tax) foreign exchange gain on long-term debt; for 2004, a
$94.4-million ($94.4 million after tax) foreign exchange gain on long-term debt; for 2003, a
$209.5-million ($224.4 million after tax) foreign exchange gain on long-term debt; for 2002, a
$13.4-million ($16.7 million after tax) foreign exchange gain on long-term debt; and for 2001, a
$58.2-million ($48.2 million after tax) foreign exchange loss on long-term debt.(5)
    
    These earnings measures are not in accordance with GAAP and may not be comparable to
similar measures of other companies. CPRs results, before foreign exchange gains and losses on
long-term debt and other specified items as defined in this summary, are presented to provide the
reader with information that is readily comparable to prior years results. By excluding foreign
exchange gains and losses on long-term debt, the impact of volatile short-term exchange rate
fluctuations, which can only be realized when long-term debt matures or is settled, is largely
eliminated. By also excluding other specified items, the results better reflect ongoing operations
at CPR.
  Common Share Market Prices
 2005
    
    
    2004Toronto Stock Exchange(Canadian dollars)
    
    High
    
    
    Low
    
    
    High
    
    
    LowFirst Quarter
    
    
    46.52
    
    
    
    38.70
    
    
    
    37.55
    
    
    
    30.32Second Quarter
    
    
    46.88
    
    
    
    41.46
    
    
    
    33.10
    
    
    
    29.36Third Quarter
    
    
    50.49
    
    
    
    41.79
    
    
    
    34.22
    
    
    
    31.60Fourth Quarter
    
    
    52.70
    
    
    
    46.60
    
    
    
    41.55
    
    
    
    32.45Year
    
    
    52.70
    
    
    
    38.70
    
    
    
    41.55
    
    
    
    29.36New York Stock Exchange(U.S. dollars)
    
    High
    
    
    Low
    
    
    High
    
    
    LowFirst Quarter
    
    
    38.05
    
    
    
    31.52
    
    
    
    29.13
    
    
    
    22.65Second Quarter
    
    
    37.85
    
    
    
    33.60
    
    
    
    25.17
    
    
    
    21.40Third Quarter
    
    
    43.40
    
    
    
    33.71
    
    
    
    26.25
    
    
    
    23.83Fourth Quarter
    
    
    45.34
    
    
    
    39.56
    
    
    
    34.50
    
    
    
    25.58Year
    
    
    45.34
    
    
    
    31.52
    
    
    
    34.50
    
    
    
    21.40Number of registered shareholders at year end
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,320Market prices at year endToronto Stock Exchange
    
    
    
    
    
    
    
    
    
    
    
    
    
    CDN $48.71New York Stock Exchange
    
    
    
    
    
    
    
    
    
    
    
    
    

    US    $41.95
 92




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##### 



Shareholder Administration
 Common Shares
   
 4 % Consolidated Debenture Stock
  
 Market for Securities
  Trading Symbol
  Duplicate Annual Reports
  Direct Deposit of Dividends
  93




---



##### 



Corporate Governance
   Governance Standards
  Chief Executive Officer Certification Regarding Compliance with NYSE Listing Standards
  94




---



##### 



Directors & Committees
 Stephen E. Bachand (1) (2) (4)
 
 John E. Cleghorn, O.C., F.C.A. (1) (2) (5)
 
 Tim W. Faithfull (2) (3) (4)
 
 James E. Newall, O.C. (2)
 
 Dr. James R. Nininger (2) (3) (4)
 
 Madeleine Paquin (1) (2) (3)
 
 Michael E.J. Phelps, O.C. (2) (3) (4) (5)
 
 Roger Phillips, O.C. (1) (2) (5)
 
 Robert J. Ritchie
 
 Michael W. Wright (1) (2) (4)
 
 
 (1)
 (2)
 (3)
 (4)
 (5)
 95




---



##### 



Senior Officers of the Company
 James E. Newall, O.C.
 
 Robert J. Ritchie (1)
 
 Frederick J. Green (1)
 
 Michael T. Waites (1)
 
 Allen H. Borak (1)
 
 Neal R. Foot (1)
 
 Paul A. Guthrie, Q.C. (1)
 
 Jane A. OHagan (1)
 
 R. Andrew Shields (1)
 
 Marcella M. Szel (1)
 
 W. Paul Bell
 
 Paul Clark
 
 Brian W. Grassby
 
 Tracy A. Robinson
 
 Donald F. Barnhardt
 
 
 (1)
    
    Management Executive Committee of Canadian Pacific Railway
 96




---



##### 



Our strategy is to expand at a smart
pace  not very far ahead of demand but
with a commitment that if the economic
proposition is appealing and the regulatory
environment is stable, we will grow with
our customers. productivity




---



##### 



LEVERAGEcapacity THE CPR FRANCHISE OFFERS A UNIQUE BLEND OF POSITIVE MARKET FUNDAMENTALS. BULK
RESOURCE DEMAND IS STRONG. INTERMODAL CONTAINER TRAFFIC IS A MAJOR GROWTH ENGINE.
THE MERCHANDISE SECTOR IS PERFORMING WELL. OUR MAJOR PARTNERS ARE ALSO INVESTING
IN THEIR CAPACITY AND WE ARE GROWING TOGETHER. CPRS LINES OF BUSINESS Bulk Grain, coal, sulphur and fertilizers
for overseas and North American
markets.CPRs resource base
has experienced a positive secular
change, driven by global economics.
In 2005, export potash continued
to grow substantially, world
demand for metallurgical coal hit
record levels, exports of U.S. grain
reached new highs, and sulphur volumes remained healthy. The
positive trend is expected to
continue in 2006. Key customers
plan to increase their production
capacity and CPR has the track
capacity to handle this growth.
New high-capacity grain and coal
cars will be acquired in 2006,
enabling CPR to move more
product per train, increasing
productivity and reducing costs.
Innovative operating concepts that
increase train length, reduce cycle
times and balance the flow of
loaded deliveries and empty
returns will also be introduced. Intermodal Consumer goods shipped in
containers that can move by
train, truck and ship.CPR has
increased intermodal margins




---



##### 



by double-digit rates over the past
two years. In 2005, CPRs import
container volumes through the
Pacific Gateway grew as North
American retailers increasingly
sourced consumer goods from
Asia-Pacific countries, particularly
China. Solid GDP growth and
strong consumer spending also
contributed to CPRs intermodal
growth. Highway competition
eroded as truck companies faced
rising costs and driver shortages.
These trends are expected to
continue in 2006. CPR will grow
the intermodal business with
a focus on price and improved
margins and greater operating
efficiency, including accelerated
container handlings in terminals
and trains that bypass yards
to reduce transit times. The
Vancouver and Montreal gateways
are expanding and CPR has the
capacity to handle their growth.
Merchandise
Forest, automotive, and
industrial and consumer products
that move from and to many
locations.CPR took advantage
of robust demand across its
network to upgrade its merchandise
business in 2005, increasing prices
and targeting growth where the
margins were sufficient to warrant
the required capacity. Fuel cost
recovery was expanded and a
structured, centralized and fully
automated pricing program was
implemented. Service performance
and productivity improved in 2005.
Revenue is expected to grow
in 2006, reflecting a healthy price
environment and improved service
as CPR continues to focus on
execution excellence. CPR will
expand its use of centralized truckrail
transfer facilities to consolidate
high-cost, low-volume shipments,
increase asset velocity and provide
value-added services. Operating
costs are expected to decline as
CPR improves the flow of freight
cars through its yards.




---



##### 



2006 Annual and Special
Meeting of Shareholders
The Annual and Special Meeting
of Shareholders will be held on
Friday, May 5, 2006, at the Fairmont
Palliser Hotel, 133  9th Avenue S.W.,
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 Investor Relations,
Canadian Pacific Railway, Suite 500,
Gulf Canada Square, 401- 9th Avenue
S.W., Calgary, Alberta, Canada
T2P 4Z4
Communications and Public Affairs
Contact 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