Document:

exv4w7

Exhibit 4.7

SUPPLEMENTAL UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES DIFFERENCES AND DISCLOSURES

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

In millions of Canadian dollars, except per share data

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

Accounts receivable and other current assets

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

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

Short-term borrowings

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

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

1

 

Accounts payable and accrued liabilities

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

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

Stock-based compensation

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

Significant assumptions

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

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

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

Disclosure of non-vested options

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

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

2

 

Aggregate intrinsic value of options outstanding and exercisable

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

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

Options exercised

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

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

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

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

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

3

 

Share based liabilities paid

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

Plan

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

Capitalized stock compensation

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

Unrecognized compensation costs

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

Plan

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

Stock compensation expense

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

Income taxes

Deferred income taxes reconciliation

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

Expiry of tax losses and credits

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

Disclosure of uncertainty in income tax positions

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

4

 

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

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

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

The Company and its subsidiaries are subject to either Canadian federal and provincial income tax,
U.S. federal, state and local income tax, or the relevant income tax in other international
jurisdictions. The Company has substantially concluded all Canadian federal and provincial income
tax matters for the years through 2003. The federal and provincial income tax returns filed for
2004 and subsequent years remain subject to examination by the taxation authorities.

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

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

Pensions and other benefits

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

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

5

 

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

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

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

Estimated future benefit payments

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

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

Components of net periodic benefit cost

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

Pensions under U.S. GAAP

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

6

 

Other benefits under U.S. GAAP

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

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

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

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

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

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

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

7

 

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

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

Unfunded pension/minimum pension liability

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

Unfunded post-retirement benefits

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

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

Business combination

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

8

 

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

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

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

Significant equity method investee

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

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

Environmental remediation

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

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

9

 

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

Statement of consolidated cash flows

Income taxes paid

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

Dividends declared

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

Balance sheet presentation

Authorized and issued common shares

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

Net properties

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

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

Presentation of income statement components

Revenues

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

Operating income before the following

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

Interest expense

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

10

 

Rental expense for operating leases

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

Amortization of discount on accruals

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

Income before income tax expense and equity income

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

11

 

	 	 	 
	 

	 	PricewaterhouseCoopers LLP
	 

	 	Chartered Accountants
	 

	 	111 5th Avenue SW, Suite 3100
	 

	 	Calgary, Alberta
	 

	 	Canada T2P 5L3
	 

	 	Telephone +1 (403) 509 7500
	 

	 	Facsimile +1 (403) 781 1825

Report of Independent Auditors on

Supplemental United States Generally Accepted Accounting Principles Differences and

Disclosures

To the Board of Directors of Canadian Pacific Railway Limited

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

	 	 	 
	/s/ PricewaterhouseCoopers LLP
 

PricewaterhouseCoopers LLP

	 	 
	Chartered Accountants
	 	 

Calgary, Alberta, Canada

February 19, 2008

PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP and the other
member firms of PricewaterhouseCoopers International Limited, each of which is a separate and
independent legal entity.exv4w8

Exhibit 4.8

RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (UNAUDITED)

As at September 30, 2008 and for the nine months ended September 30, 2008 and 2007

In millions of Canadian dollars, except per share data

This information should be read in conjunction with the unaudited interim consolidated financial
statements of Canadian Pacific Railway Limited (“CP” or “the Company”) as at September 30, 2008 and
for the nine month periods ended September 30, 2008 and 2007. The unaudited interim consolidated
financial statements of the Company were prepared in accordance with generally accepted accounting
principles (“GAAP”) in Canada. The material differences between Canadian and U.S. GAAP are
explained and quantified below, along with their effect on the Company’s Statement of Consolidated
Income and Consolidated Balance Sheet. For a complete discussion of U.S. and Canadian GAAP
differences, as they relate to the Company, see Note 24 to the consolidated financial statements
for the year ended December 31, 2007 in the Company’s 2007 Annual Report and the Supplemental
United States Generally Accepted Accounting Principles Differences and Disclosures. In
management’s opinion, the unaudited interim consolidated financial statements and this
reconciliation include all adjustments (consisting solely of normal recurring adjustments)
necessary to present fairly such information.

	 	(a)	 	Accounting for derivative instruments and hedging: The measurement and recognition
rules for derivative instruments and hedging under Canadian GAAP, as described in CICA
accounting standards Section 3855 “Financial Instruments, Recognition and Measurement”,
Section 3861 “Financial Instruments, Presentation and Disclosure”, Section 3865 “Hedging”,
Section 1530 “Comprehensive Income” and Section 3251 “Equity”, are largely harmonized with
U.S. GAAP, as stated in Financial Accounting Standards Board (“FASB”) Statement No. 133
“Accounting for Derivative Instruments and Hedging Activities” (“FASB 133”). However,
under Canadian GAAP, only the ineffective portion of a net investment hedge that represents
an over hedge is recognized in income, whereas under U.S. GAAP, any ineffective portion is
recognized in income immediately. As well, transaction costs have been added to the fair
value of the “Long-term debt” under Canadian GAAP whereas under U.S. GAAP such costs are
recorded separately with “Other assets and deferred charges”.
	 
	 	(b)	 	Pensions and post-retirement benefits: On December 31, 2006, CP adopted FASB Statement
No. 158 “Employers’ Accounting for Defined Benefit Pension and other Postretirement Plans”
(“FASB 158”). Under U.S. GAAP, the Company is required to recognize the over or under
funded status of defined benefit pension and other post-retirement plans on the balance
sheet. The over or under funded status is measured as the difference between the fair
value of the plan assets and the benefit obligation, being the projected obligation for
pension plans and the accumulated benefit obligation for other post-retirement plans. In
addition, any previously unrecognized actuarial gains and losses and prior service costs
and credits that arise during the period will be recognized as a component of other
comprehensive income (“OCI”), net of tax. No similar requirement currently exists under
Canadian GAAP.
	 
	 	(c)	 	Post-employment benefits: Post-employment benefits are covered by the CICA
recommendations for accounting for employee future benefits. Consistent with accounting
for post-retirement benefits, the policy permits amortization of actuarial gains and losses
only if they fall outside of the corridor. Under FASB Statement No. 112 “Employers’
Accounting for Post-employment Benefits” (“FASB 112”), such gains and losses on
post-employment benefits that do not vest or accumulate are included immediately in income.
	 
	 	(d)	 	Termination and severance benefits: Termination and severance benefits are covered by
the CICA Section 3461 and the CICA Emerging Issues Committee Abstract 134 “Accounting for
Severance and Termination Benefits” (“EIC 134”). Upon transition to the CICA Section 3461
effective January 1, 2000, a net transitional asset was created and is being amortized to
income over approximately 13 years. Under U.S. GAAP, the expected benefits were not
accrued and are expensed when paid.
	 
	 	(e)	 	Stock-based compensation: U.S. GAAP requires the use of an option-pricing model to
fair value, at the grant date, share-based awards issued to employees, including stock
options, stock appreciation rights (“SARs”) and deferred share units (“DSUs”). SARs and
DSUs are subsequently re-measured at fair value at each reporting period. Under Canadian
GAAP, liability awards, such as SARs and DSUs, are accounted for using the intrinsic
method. U.S. GAAP also requires that CP accounts for forfeitures on an estimated basis.
Under Canadian GAAP, CP has elected to account for forfeitures on an actual basis as they
occur.

1

 

	 	 	 	In addition, on adoption of FASB Statement No. 123 Revised 2004 — “Share Based Payment”
(“FASB 123R”), CP has recognized compensation cost attributable to stock-based awards over
the period from the grant date to the date the employee becomes eligible to retire when this
is shorter than the vesting period (the “non-substantive vesting period approach”).
Previously CP recognized the compensation cost over the vesting period (the “nominal vesting
period approach”). Canadian GAAP has similar provisions for the recognition of the
compensation cost attributable to stock-based awards over the shorter of the period from
grant date to vesting or eligibility for retirement. However, Canadian GAAP introduced
these provisions with effect for the year ended December 31, 2006 and the Company adopted
them with retroactive restatement of prior periods.
	 
	 	 	 	Under FASB Interpretation No. 44 “Accounting for Certain Transactions Involving Stock
Compensation” (“FIN 44”), compensation expense must be recorded if the intrinsic value of
stock options is not exactly the same immediately before and after an equity restructuring.
As a result of the Canadian Pacific Limited (“CPL”) corporate reorganization in 2001, CPL
underwent an equity restructuring, which resulted in replacement options in CP stock having
a different intrinsic value after the restructuring than prior to it. Canadian GAAP did not
require the revaluation of these options. The Company adopted on a prospective basis
effective January 2003 the CICA Section 3870 “Stock-based Compensation and Other Stock-based
Payments”, which requires companies to account for stock options at their fair value.
Concurrently, the Company elected to also account for stock options at their fair value
under FASB Statement No. 123 “Accounting for Stock-based Compensation” (“FASB 123”).
	 
	 	(f)	 	Internal use software: Under the American Institute of Certified Public Accountants
Statement of Position No. 98-1 “Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use” (“SOP 98-1”), certain costs, including preliminary project phase
costs, are to be expensed as incurred. These costs are capitalized under Canadian GAAP.
	 
	 	(g)	 	Capitalization of interest: The Company expenses interest related to capital projects
undertaken during the year unless specific debt is attributed to a capital program. FASB
Statement No. 34 “Capitalization of Interest Cost” (“FASB 34”) requires interest costs to
be capitalized for all capital programs. Differences in GAAP result in additional
capitalization of interest under U.S. GAAP and subsequent related depreciation.
	 
	 	(h)	 	Comprehensive income: Under U.S. GAAP, all derivative instruments are recognized on
the balance sheet as either an asset or a liability measured at fair value. Changes in the
fair value of derivatives are either recognized in earnings or in other comprehensive
income depending on whether specific hedge criteria are met.
	 
	 	 	 	FASB Statement No. 130 “Reporting Comprehensive Income” requires disclosure of the change in
equity from transactions and other events related to non-owner sources during the period.
In 2008 and the comparative period presented, the differences in other comprehensive income
under U.S. GAAP arose from foreign currency translation related to long-term debt designated
as a hedge of the net investment in foreign subsidiaries and unfunded pension liability.
	 
	 	(i)	 	Joint venture: The CICA Section 3055 “Interest in Joint Ventures” requires the
proportionate consolidation method to be applied to the recognition of interests in joint
ventures in consolidated financial statements. The Company has a joint-venture interest in
the Detroit River Tunnel Partnership (“DRTP”). FASB Accounting Principles Board Opinion
No. 18 “The Equity Method of Accounting for Investments in Common Stock” (“APB 18”)
requires the equity method of accounting to be applied to interests in joint ventures.
This has no effect on net income as it represents a classification difference within the
Statement of Consolidated Income and Consolidated Balance Sheet. Equity income from DRTP
in the nine months ended September 30, 2008 was $7.3 million (nine months ended September
30, 2007 — $8.2 million).
	 
	 	(j)	 	Offsetting contracts: FASB Financial Interpretation No. 39 “Offsetting of Amounts
Relating to Certain Contracts” (“FIN 39”) does not allow netting of assets and liabilities
among three parties. In 2003, the Company and one of its subsidiaries entered into a
contract with a financial institution. Under Canadian GAAP, offsetting amounts with the
same party and with a legal right to offset are netted against each other.
	 
	 	(k)	 	Start-up costs: Under EIC 27 “Revenues and Expenditures during the Pre-Operating
Period”, costs incurred for projects under development may be deferred until the projects
are substantially complete. Upon completion, these costs are amortized based on the
expected period and pattern of benefit of the expenditures. Under U.S. GAAP, these costs
are expensed as incurred.

2

 

	 	(l)	 	Capital leases: Under FASB Statement No. 13 “Accounting for Leases”, which prescribes
certain recognition criteria for a capital lease, certain leases, which the Company has
recorded as capital leases under Canadian GAAP, do not meet the criteria for capital leases
and are recorded as operating leases. These relate to equipment leases, previously
recorded as operating leases under Canadian and U.S. GAAP, which were renewed within the
last 25 percent of the equipment’s useful life. Under U.S. GAAP, these continue to be
operating leases.
	 
	 	(m)	 	Statement of cash flows: There are no material differences in the Statement of
Consolidated Cash Flows under U.S. GAAP. However, U.S. GAAP requires the disclosure of
income taxes paid. Canadian GAAP requires the disclosure of income tax cash flows, which
would include any income taxes recovered during the year. For the nine months ended
September 30, 2008, income taxes paid were $14.8 million (nine months ended September 30,
2007 — $62.7 million).
	 
	 	(n)	 	Dividends declared per share: Dividends declared per share in the nine months ended
September 30, 2008 were $0.7425 (nine months ended September 30, 2007 — $0.6750).

The application of U.S. GAAP, as described above, would have had the following effects on net
income, and comprehensive income.

	 	 	 	 	 	 	 	 	 
	 	 	For the nine months	 
	 	 	ended September 30	 
	In millions of Canadian dollars except per share amounts	 	2008	 	 	2007	 
	 
	 
	 	 	 	 	 	 	 	 
	Net Income — Canadian GAAP
	 	$	418.4	 	 	$	603.9	 
	 
	 	 	 	 	 	 	 	 
	Increased (decreased) by:
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Pension costs
	 	 	2.0	 	 	 	6.3	 
	 
	 	 	 	 	 	 	 	 
	Post-retirement benefits costs
	 	 	7.2	 	 	 	7.6	 
	 
	 	 	 	 	 	 	 	 
	Post-employment benefits costs
	 	 	0.9	 	 	 	0.9	 
	 
	 	 	 	 	 	 	 	 
	Termination and severance benefits
	 	 	(6.6	)	 	 	(6.7	)
	 
	 	 	 	 	 	 	 	 
	Internal use software — additions
	 	 	(14.9	)	 	 	(8.8	)
	 
	 	 	 	 	 	 	 	 
	Internal use software — depreciation
	 	 	9.2	 	 	 	8.0	 
	 
	 	 	 	 	 	 	 	 
	Stock-based compensation
	 	 	7.4	 	 	 	(3.6	)
	 
	 	 	 	 	 	 	 	 
	Gain (loss) on ineffective portion of hedges
	 	 	2.1	 	 	 	(4.1	)
	 
	 	 	 	 	 	 	 	 
	Capitalized interest — additions
	 	 	20.3	 	 	 	14.3	 
	 
	 	 	 	 	 	 	 	 
	Capitalized interest — depreciation
	 	 	(5.2	)	 	 	(4.3	)
	 
	 	 	 	 	 	 	 	 
	Start-up costs
	 	 	(0.7	)	 	 	(0.8	)
	 
	 	 	 	 	 	 	 	 
	Future/deferred income tax expense related to net income
	 	 	(11.5	)	 	 	(12.8	)
	 
	Net Income — U.S. GAAP
	 	$	428.6	 	 	$	599.9	 
	 

3

 

	 	 	 	 	 	 	 	 	 
	 	 	For the nine months	 
	 	 	ended September 30	 
	In millions of Canadian dollars except per share amounts	 	2008	 	 	2007	 
	 
	 
	 	 	 	 	 	 	 	 
	Other comprehensive income (loss) — Canadian GAAP
	 	$	13.9	 	 	$	(26.6	)
	 
	 	 	 	 	 	 	 	 
	Increased (decreased) by:
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Unrealized foreign exchange (gain) loss on designated
net investment hedge
	 	 	(2.1	)	 	 	4.1	 
	 
	 	 	 	 	 	 	 	 
	Unfunded pension and post-retirement liability adjustment
	 	 	64.1	 	 	 	75.0	 
	 
	 	 	 	 	 	 	 	 
	Future/deferred income tax expense related to other
comprehensive income
	 	 	(18.5	)	 	 	(25.0	)
	 
	Other comprehensive income — U.S. GAAP
	 	$	57.4	 	 	$	27.5	 
	 
	 
	 	 	 	 	 	 	 	 
	Earnings per share — U.S. GAAP
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Basic earnings per share
	 	$	2.79	 	 	$	3.89	 
	 
	 	 	 	 	 	 	 	 
	Diluted earnings per share
	 	$	2.76	 	 	$	3.85	 
	 

A summary of comprehensive income resulting from Canadian and U.S. GAAP differences is as follows:

	 	 	 	 	 	 	 	 	 
	 	 	For the nine months	 
	 	 	ended September 30	 
	In millions of Canadian dollars	 	2008	 	 	2007	 
	 
	 
	 	 	 	 	 	 	 	 
	Comprehensive income
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Canadian GAAP
	 	$	432.3	 	 	$	577.3	 
	 
	 	 	 	 	 	 	 	 
	U.S. GAAP
	 	$	486.0	 	 	$	627.4	 
	 

A summary of operating income resulting from Canadian and U.S. GAAP differences is as follows:

	 	 	 	 	 	 	 	 	 
	 	 	For the nine months	 
	 	 	ended September 30	 
	In millions of Canadian dollars	 	2008	 	 	2007	 
	 
	 
	 	 	 	 	 	 	 	 
	Operating income
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Canadian GAAP
	 	$	752.5	 	 	$	858.7	 
	 
	 	 	 	 	 	 	 	 
	U.S. GAAP
	 	$	746.8	 	 	$	851.1	 
	 

4

 

Consolidated Balance Sheet

Had the Consolidated Balance Sheet been prepared under U.S. GAAP, the differences would have been
as follows (higher/(lower)):

	 	 	 	 	 	 	 	 	 
	In millions of Canadian dollars	 	Sept. 30, 2008	 	 	Dec. 31, 2007	 
	 
	 
	 	 	 	 	 	 	 	 
	Assets
	 	 	 	 	 	 	 	 
	Current assets
	 	 	 	 	 	 	 	 
	Cash
	 	 	 	 	 	 	 	 
	Investment in joint ventures
	 	$	(0.1	)	 	$	(0.2	)
	Accounts receivable and other current assets
	 	 	 	 	 	 	 	 
	Investment in joint ventures
	 	 	—	 	 	 	1.4	 
	Long-term assets
	 	 	 	 	 	 	 	 
	Investments
	 	 	 	 	 	 	 	 
	Investment in joint ventures
	 	 	50.3	 	 	 	48.9	 
	Start-up costs
	 	 	(12.3	)	 	 	(11.6	)
	Properties
	 	 	 	 	 	 	 	 
	Capitalized interest
	 	 	175.1	 	 	 	160.0	 
	Internal use software
	 	 	(60.9	)	 	 	(55.2	)
	Investment in joint ventures
	 	 	(35.9	)	 	 	(36.1	)
	Capital leases
	 	 	(9.8	)	 	 	(10.4	)
	Other assets and deferred charges
	 	 	 	 	 	 	 	 
	Pension
	 	 	(1,147.4	)	 	 	(1,103.1	)
	Long-term receivable
	 	 	198.9	 	 	 	190.3	 
	Transaction costs on long-term debt
	 	 	45.3	 	 	 	36.0	 
	Investment in joint ventures
	 	 	(15.5	)	 	 	(14.8	)
	 
	Total assets
	 	$	(812.3	)	 	$	$(794.8	)
	 

5

 

	 	 	 	 	 	 	 	 	 
	In millions of Canadian dollars	 	Sept. 30, 2008	 	 	Dec. 31, 2007	 
	 
	 
	 	 	 	 	 	 	 	 
	Liabilities and shareholders’ equity
	 	 	 	 	 	 	 	 
	Current liabilities
	 	 	 	 	 	 	 	 
	Accounts payable and accrued liabilities
	 	 	 	 	 	 	 	 
	Investment in joint ventures
	 	$	(0.7	)	 	$	(0.4	)
	Income and other taxes payable
	 	 	 	 	 	 	 	 
	Investment in joint ventures
	 	 	—	 	 	 	(0.1	)
	Long-term debt maturing within one year
	 	 	 	 	 	 	 	 
	Capital leases
	 	 	(0.8	)	 	 	(0.7	)
	 
	 	 	 	 	 	 	 	 
	Long-term liabilities
	 	 	 	 	 	 	 	 
	Deferred liabilities
	 	 	 	 	 	 	 	 
	Termination and severance benefits
	 	 	(3.6	)	 	 	(10.2	)
	Post-employment benefit liability
	 	 	4.3	 	 	 	5.2	 
	Under funded status of defined benefit pension and other post — retirement plans
	 	 	455.4	 	 	 	573.0	 
	Investment in joint ventures
	 	 	(0.5	)	 	 	(0.5	)
	Stock-based compensation
	 	 	(5.6	)	 	 	0.2	 
	Long-term debt
	 	 	 	 	 	 	 	 
	Bank loan
	 	 	198.9	 	 	 	190.3	 
	Capital leases
	 	 	(9.0	)	 	 	(9.7	)
	Transaction costs on long-term debt
	 	 	45.3	 	 	 	36.0	 
	Future/deferred income tax liability
	 	 	(411.5	)	 	 	(441.2	)
	 
	Total liabilities
	 	$	272.2	 	 	$	341.9	 
	 
	 
	 	 	 	 	 	 	 	 
	Shareholders’ equity
	 	 	 	 	 	 	 	 
	Share capital
	 	 	 	 	 	 	 	 
	Stock-based compensation
	 	 	21.0	 	 	$	20.9	 
	Contributed surplus
	 	 	 	 	 	 	 	 
	Stock-based compensation
	 	 	3.5	 	 	 	5.2	 
	Retained income
	 	 	(146.6	)	 	 	(156.8	)
	Accumulated other comprehensive income
	 	 	 	 	 	 	 	 
	Funding status of defined benefit pension
and other post-retirement plans
	 	 	(964.8	)	 	 	(1,010.2	)
	Unrealized foreign exchange loss on designated
net investment hedge
	 	 	2.4	 	 	 	4.2	 
	 
	Total liabilities and shareholders’ equity
	 	$	(812.3	)	 	$	(794.8	)
	 

Supplemental U.S. GAAP Disclosures

Business combination

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

U.S. GAAP requires supplemental unaudited pro forma income statement information for the period in
which a material business combination occurs. Material business combinations must be presented, on
a pro forma basis as

6

 

if the acquisition had taken place at the beginning of the fiscal period. Pro forma results are
not indicative of actual results or future performance. The pro forma information presented below
assumes this acquisition took place on January 1, 2008 and January 1, 2007, respectively. There
were no acquisitions in 2008.

	 	 	 	 	 	 	 	 	 
	 	 	For the nine months	 
	 	 	ended September 30	 
	In millions of Canadian dollars, except per share data	 	2008	 	 	2007	 
	 
	Pro forma revenue
	 	$	3,893.3	 	 	$	3,758.9	 
	Pro forma net income
	 	$	418.4	 	 	$	633.9	 
	Pro forma basic earnings per share
	 	$	2.72	 	 	$	4.11	 
	Pro forma diluted earnings per share
	 	$	2.70	 	 	$	4.07	 
	 

Pensions and other benefits

For the nine months ended September 30, 2008 and 2007, the components of net periodic benefit cost
under U.S. GAAP for defined benefit pensions and other benefits were as follows:

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	For the nine months ended September 30	 
	 	 	2008	 	 	2007	 
	In millions of Canadian dollars	 	Pensions	 	 	Other Benefits	 	 	Pensions	 	 	Other Benefits	 
	 
	Current service cost
	 	$	73.0	 	 	$	12.3	 	 	$	73.1	 	 	$	12.7	 
	Interest cost
	 	 	333.3	 	 	 	20.5	 	 	 	314.8	 	 	 	20.0	 
	Expected return on plan assets
	 	 	(436.9	)	 	 	(0.5	)	 	 	(415.7	)	 	 	(0.5	)
	Amortization of prior service cost
	 	 	23.4	 	 	 	(1.3	)	 	 	20.5	 	 	 	(1.3	)
	Recognized net actuarial loss
	 	 	35.9	 	 	 	6.1	 	 	 	49.2	 	 	 	6.6	 
	Settlement gain
	 	 	—	 	 	 	(4.3	)	 	 	—	 	 	 	(10.7	)
	 
	Net periodic benefit cost
	 	$	28.7	 	 	$	32.8	 	 	$	41.9	 	 	$	26.8	 
	 

Pension contributions

In 2008, the Company expects to make total contributions of approximately $95 million for all its
defined benefit pension plans, of which $73.2 million was disbursed as at September 30, 2008.

Recent accounting pronouncements

Framework for Fair Value Measurement 

The Company adopted the provisions of FASB Statement No. 157 “Fair Value Measurements”, effective
January 1, 2008 and all related FASB Staff Positions published to the date of this report. The
standard establishes a framework for measuring fair value and expands the disclosures about fair
value measurements. The implementation of this standard did not have a material impact on the
consolidated financial statements as the Company’s current policy on accounting for fair value
measurements is consistent with this guidance.

The fair value of financial instruments reflects the Company’s best estimates of market value based
on generally accepted valuation techniques or models and supported by observable market prices and
rates. When such prices are not available, CP incorporates probability weighted discounted cash
flows considering the best available public information regarding market conditions and other
factors that a market participant would consider for such investments. The fair value of financial
instruments, other than derivatives, represents the amounts that would have been received from or
paid to counterparties to settle these instruments at the reporting date.

7

 

Fair Value of Financial Instruments

The Company categorizes its financial assets and liabilities measured at fair value into one of
three different levels depending on the observability of the inputs employed in the measurement.
Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2
inputs are directly or indirectly observable inputs other than quoted prices. Level 3 inputs are
unobservable inputs for the asset or liability reflecting our assumptions about pricing by market
participants.

	 	•	 	Level 1: This category includes assets and liabilities measured at fair value based on
unadjusted quoted prices for identical assets and liabilities in active markets that are
accessible at the measurement date. An active market for an asset or liability is
considered to be a market where transactions occur with sufficient frequency and volume to
provide pricing information on an ongoing basis.
	 
	 	•	 	Level 2: This category includes valuations determined using directly or indirectly
observable inputs other than quoted prices included within Level 1. Derivative instruments
in this category are valued using models or other industry standard valuation techniques
derived from observable market data. Such valuation techniques include inputs such as
quoted forward prices, time value, volatility factors and broker quotes that can be
observed or corroborated in the market. Instruments valued using inputs in this category
include non exchange traded derivatives such as over the counter financial forward
contracts, as well as swaps for which observable inputs can be obtained for the entire
duration of the derivative instrument.
	 
	 	•	 	Level 3: This category includes valuations based on inputs which are less observable,
unavailable or where the observable data does not support a significant portion of the
instruments’ fair value. Generally, Level 3 valuations are longer dated transactions,
occur in less active markets, occur at locations where pricing information is not
available, or have no binding broker quote to support Level 2 classifications.

When possible the estimated fair value is based on quoted market prices, and, if not available,
estimates from third party brokers. For non exchange traded derivatives classified in Levels 2 and
3, the Company uses standard valuation techniques to calculate fair value. These methods include
discounted mark to market for forwards, futures and swaps. Primary inputs to these techniques
include observable market prices (interest, foreign exchange and commodity) and volatility,
depending on the type of derivative and nature of the underlying risk. The Company uses inputs and
data used by willing market participants when valuing derivatives and considers its own credit
default swap spread as well as those of its counterparties in its determination of fair value.
Wherever possible the Company uses observable inputs. Note 10 of the Company’s third quarter
unaudited interim consolidated financial statements provides a detailed analysis of the techniques
used to value third party asset-backed commercial paper (“ABCP”).

The following table presents the Company’s fair value hierarchy for those assets and liabilities
measured at fair value on a recurring basis as at September 30, 2008.

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	In millions of Canadian dollars	 	Level 1	 	 	Level 2	 	 	Level 3	 	 	Total	 
	 
	Financial Assets:
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Current financial assets
	 	$	—	 	 	$	15.5	 	 	$	—	 	 	$	15.5	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Long-term financial assets
	 	 	—	 	 	 	11.0	 	 	 	72.7	 	 	 	83.7	 
	 
	Financial Liabilities:
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Current financial liabilities
	 	 	—	 	 	 	26.8	 	 	 	—	 	 	 	26.8	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	Long-term financial liabilities
	 	 	—	 	 	 	0.3	 	 	 	—	 	 	 	0.3	 
	 

Fair value measurements using significant unobservable inputs (Level 3)

Below is a roll-forward of assets and liabilities measured at fair value using Level 3 inputs for
the nine months ended September 30, 2008. These instruments, related to ABCP, were valued using
pricing models that, in management’s judgment, reflect the assumptions a market place participant
would use.

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	In millions of Canadian dollars	 	Financial Assets	 
	 
	Beginning Balance, January 1, 2008
	 	$	122.1	 
	Total losses, realized and unrealized, included in earnings
	 	 	(49.4	)
	 
	Closing Balance, September 30, 2008
	 	$	72.7	 
	 

Unrealized losses are reported within the caption “Change in estimated fair value of Canadian third
party asset-backed commercial paper” on the face of the Statement of Consolidated Income.

Credit Risk

Entering into derivative financial instruments can result in exposure to credit risk. Credit risk
arises from the possibility that a counterparty will default on its contractual obligations and is
limited to those contracts where the Company would incur a loss in replacing the instrument. The
Company enters into risk management transactions only with institutions that possess investment
grade credit ratings. Credit risk relating to derivative counterparties is mitigated by credit
exposure limits, contractual and collateral requirements, frequent assessment of counterparty
credit ratings and netting arrangements.

Counterparty credit valuation adjustments may be necessary when the market price of an instrument
is not indicative of the fair value due to the credit quality of the counterparty. Generally,
market quotes assume that all counterparties have near zero, or low, default rates and have equal
credit quality. Therefore, an adjustment may be necessary to reflect the credit quality of a
specific counterparty to determine the fair value of the instrument. CP monitors the
counterparties’ credit ratings and could unwind positions if their ratings deteriorate. As of
September 30, 2008, with the exception of the ABCP, the only outstanding derivatives were crude oil
swaps, interest rate swaps, currency forwards, foreign exchange contracts on fuel, and a total
return swap that are all made with major banks.

Fair value option for financial assets and financial liabilities

FASB Statement No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities”
(“FASB 159”), which became effective January 1, 2008, permits an entity to irrevocably elect fair
value on a contract by contract basis as the initial and subsequent measurement attribute for many
financial instruments and certain other items. An entity electing the fair value option would be
required to recognize changes in fair value in earnings. At this time the Company has not elected
to account for any instruments at fair value under the fair value option of FASB 159.

Future accounting changes

FASB Statement No. 141 (revised 2007) — Business Combinations

In December 2007, FASB issued FASB Statement No. 141 (revised 2007) “Business Combinations” (“FASB
141 (revised)”) which replaces FASB Statement No. 141 “Business Combinations”. The new standard
requires the acquiring entity in a business combination, to recognize all the assets acquired and
liabilities assumed in the transaction; and recognize and measure the goodwill acquired in the
business combination or a gain from a bargain purchase. FASB 141 (revised) will be applied
prospectively to business combinations for which the acquisition date is on or after January 1,
2009. The adoption of this accounting standard will not impact the current financial statements of
the Company.

Measurement date of defined benefit pension 

FASB Statement No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106 and 123R” (“FASB 158”) requires that pension
and other post-retirement benefit plans be measured as of the balance sheet date. The Company’s
Canadian plans are already measured as of the balance sheet date; however, the U.S. pension plans
had a November 30 measurement date. FASB 158 provides two approaches to transition to a fiscal
year-end measurement date, both of which are applied prospectively. Under the first approach, the
plan assets are measured on November 30, 2007, and then re-measured on January 1, 2008. Under the
alternative approach, the plan assets are measured on November 30, 2007 and the next re-measurement
is not until December 31, 2008. CP has elected to adopt this change in measurement date using the
latter approach. The impact of adopting a plan measurement date at the balance sheet date for the

9

 

Company’s U.S. plans is not expected to be material to the financial position and results of
operations for the Company.

FSP 157-2 — Nonfinancial Assets and Nonfinancial Liabilities

In February 2008, the FASB issued FASB Staff Position on Statement No. 157 “Effective
Date of FASB Statement No. 157” (FSP 157-2). FSP 157-2 delays the effective date of
FASB Statement No. 157 for nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed on a recurring basis, to fiscal years beginning
after November 15, 2008. Our significant nonfinancial assets and liabilities that
could be impacted by this deferral include assets and liabilities initially measured at
fair value in a business combination and goodwill tested annually for impairment. The
adoption of FSP 157-2 is not expected to have a significant impact on the financial
position and the results of operations of the Company.

FASB Statement No. 160 — Non-controlling Interests in Consolidated Financial Statements

In December 2007, FASB issued FASB Statement No. 160 “Non-controlling Interests in
Consolidated Financial Statements” (“FASB 160”) which requires the Company to report
non-controlling interests in subsidiaries as equity in the consolidated financial
statements; and all transactions between an entity and non-controlling interests as
equity transactions. FASB 160 is effective for the Company commencing on January 1,
2009 and is unlikely to impact the financial statements of the Company at that time.

FASB Statement No. 161 — Disclosures about Derivative Instruments and Hedging Activities 

In March 2008, the FASB issued FASB Statement No. 161 “Disclosures about Derivative Instruments and
Hedging Activities”. The standard requires enhanced disclosures about an entity’s derivative and
hedging activities. Entities are required to provide enhanced disclosures about (i) how and why an
entity uses derivative instruments, (ii) how derivative instruments and related hedged items are
accounted for, and (iii) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. The standard increases convergence with
International Financial Reporting Standards, as it relates to disclosures of derivative
instruments. The Company is currently reviewing the guidance, which is effective for fiscal years
beginning after November 15, 2008, to determine the potential impact on its consolidated financial
statements.

FASB Statement No. 162 — The Hierarchy of Generally Accepted Accounting Principles 

In May 2008, the FASB issued FASB Statement No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”. This standard identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with U.S. GAAP. The FASB does not expect
that this standard will result in a change in current practice. FASB Statement No. 162 will become
effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411 “The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles”. The Company is currently reviewing the guidance to determine the potential
impact, if any, on its consolidated financial statements.

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