CPKC (Canadian Pacific Kansas City) - 40-F annual report

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

For the fiscal year ended December 31, 2005

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

For annual reports, indicate by check mark the information filed with this form:

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

At December 31, 2005, 158,176,165 Common Shares of Canadian Pacific Railway Limited were issued and outstanding. At December 31, 2005, 347,170,009 Ordinary Shares of Canadian Pacific Railway Company were issued and outstanding.

Indicate by check mark whether the Registrant by filing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). If “Yes” is marked, indicate the file number assigned to the Registrant in connection with such Rule.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

               The Registrants’ Annual Report on Form 40-F for the year ended December 31, 2005, at the time of filing with the Securities and Exchange Commission, modifies and supersedes all prior documents filed pursuant to Sections 13 and 15(d) of the Exchange Act for purposes of any offers or sales of any securities after the date of such filing pursuant to any Registration Statement under the Securities Act of 1933 of either Registrant which incorporates by reference such Annual Report, including without limitation the following: Form S-8 No. 333-13962 (Canadian Pacific Railway Limited); and Form S-8 No. 333-127943 (Canadian Pacific Railway Limited). The documents (or portions thereof) identified under the heading “Documents Filed as Part of This Report” below as forming part of this Form 40-F are incorporated by reference into the Registration Statement on Form F-9 No. 333-114696 (Canadian Pacific Railway Company) as exhibits thereto.

A.     Audited Annual Financial Statements

               For consolidated audited financial statements, including the report of the auditors with respect thereto, see pages 47 through 92 of the Registrants’ 2005 Annual Report incorporated by reference and included herein. For a reconciliation of important differences between Canadian and United States generally accepted accounting principles, see Note 28 — Supplementary Data of the Notes to Consolidated Financial Statements on pages 85 through 92 of such 2005 Annual Report.

B.     Management’s Discussion and Analysis

               For management’s discussion and analysis, see pages 4 through 46 of the Registrants’ 2005 Annual Report incorporated by reference and included herein.

               For the purposes of this Annual Report on Form 40-F, only pages 4 through 92 of the Registrants’ 2005 Annual Report referred to above shall be deemed filed, and the balance of such 2005 Annual Report, except as it may be otherwise specifically incorporated by reference in the Registrants’ Annual Information Form, shall be deemed not filed with the Securities and Exchange Commission as part of this Annual Report on Form 40-F under the Exchange Act.

               As of December 31, 2005, an evaluation was carried out under the supervision of and with the participation of the Registrants’ management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Registrants’ disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of December 31, 2005, to ensure that information required to be disclosed by the Registrants in reports that they file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

               During the period covered by this Annual Report on Form 40-F no changes occurred in the Registrants’ internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Registrants’ internal control over financial reporting.

               The Registrants’ Code of Business Ethics was last revised in late 2003 to ensure that it was in compliance with the corporate governance standards of the New York Stock Exchange (“NYSE Standards”) and specifically addresses, among other things, conflicts of interest, protection and proper use of corporate assets and opportunities, confidentiality of corporate information, fair dealing with third parties, compliance with laws, rules and regulations and reporting of illegal or unethical behavior. The Code applies to all directors, officers and employees, both unionized and non-unionized, of the Registrants and their subsidiaries in Canada, the U.S. and elsewhere, and forms part of the terms and conditions of employment of all such individuals. Contractors engaged on behalf of the Registrants or their subsidiaries must undertake, as a condition of their engagement, to adhere to principles and standards of business conduct consistent with those set forth in the Code. The Code is available on the Registrants’ web site at www.cpr.ca and in print to any shareholder who requests it. All amendments to the Code, and all waivers of the Code with respect to any director or executive officer of the Registrants, will be posted on the Registrants’ web site and provided in print to any shareholder who requests them.

               The Registrants adopted a Code of Ethics for Chief Executive Officer and Senior Financial Officers in 2003. This code applies to the Registrants’ President and Chief Executive Officer, the Executive Vice-President and Chief Financial Officer and the Vice-President and Comptroller. It is available on the Registrants’ web site at www.cpr.ca and in print to any shareholder who requests it. All amendments to the code, and all waivers of the code with respect to any of the officers covered by it, will be posted on the Registrants’ web site and provided in print to any shareholder who requests them.

               The Registrants last amended their Corporate Governance Principles and Guidelines in February 2006. These principles and guidelines pertain to such matters as, but are not limited to: director qualification standards and responsibilities; access by directors to management and independent advisors; director compensation; director orientation and continuing education; management succession; and annual performance evaluations of the board, including its committees and individual directors, and of the Chief Executive Officer. The Corporate Governance Principles and Guidelines are available on the Registrants’ web site at www.cpr.ca and in print to any shareholder who requests them.

               The terms of reference of each of the following committees of the Registrants are available on the Registrants’ web site at www.cpr.ca and in print to any shareholder who requests them: the Audit, Finance and Risk Management Committee; the Corporate Governance and Nominating Committee; the Management Resources and Compensation Committee; the Environmental and Safety Committee; and the Pension Trust Fund Committee.

               The boards of the Registrants have adopted the categorical standards for director independence and unrelatedness: (a) prescribed by Section 10A(m)(3) of the Exchange Act and Rule 10A-3(b)(1) promulgated thereunder and Multilateral Instrument 52-110 for members of public company audit committees; and (b) set forth in the NYSE Standards, the Canadian corporate governance standards set forth in National Instrument 58-101 and Multilateral Instrument 52-110 in respect of public company directors. The boards also conducted a comprehensive assessment of each of their members as against these standards and determined that all current directors, except R.J. Ritchie, have no material relationship with the Registrants and are independent and unrelated. Mr. Ritchie is not independent or unrelated by virtue of the fact that he is the Chief Executive Officer of the Registrants.

               The Corporate Governance and Nominating Committees of the boards of the Registrants are comprised of all the unrelated and independent directors on the boards and are required by their terms of reference to meet at least quarterly and at such other times as they deem appropriate. The Governance and Nominating Committees met 5 times during 2005. They are chaired by Mr. J.E. Newall. Interested parties may communicate directly with Mr. Newall by writing to him at the following address, and all communications received at this address will be forwarded to him:

Office of the Corporate Secretary
Canadian Pacific Railway
Suite 920, 401 – 9^th Avenue, S.W.
Calgary, Alberta
Canada
T2P 4Z4

               The following individuals comprise the entire membership of the Registrants’ Audit, Finance and Risk Management Committees (“Audit Committees”), which have been established in accordance with Section 3(a)(58)(A) of the Exchange Act:

Stephen E. Bachand
John E. Cleghorn
M. Paquin
Roger Phillips
Michael W. Wright

               Each of the aforementioned directors, except Ms. Paquin, has been determined by the boards of the Registrants to meet the audit committee financial expert criteria prescribed by the Securities and Exchange Commission and has been designated as an audit committee financial expert for the Audit Committees of the boards of both Registrants. Each of the aforementioned directors has also been determined by the boards of the Registrants to be independent within the criteria referred to above under the subheading “Director Independence”.

               The boards of the Registrants have determined that all members of the Audit Committees have “accounting or related financial management expertise” within the meaning of the NYSE Standards. The boards have determined that all members of the Audit Committees are financially literate within the definition contained in, and as required by, Multilateral Instrument 52-110 and the NYSE Standards.

               John E. Cleghorn serves on two public company audit committees, in addition to the Audit Committees of the two Registrants. Each Registrant’s board has determined that no director who serves on more than two public company audit committees other than its own Audit Committee shall be eligible to serve as a member of the Audit Committee of that Registrant, unless that Registrant’s board determines that such simultaneous service would not impair the ability of such member to effectively serve on that Registrant’s Audit Committee.

               The boards of the Registrants have determined that the service of Mr. Cleghorn on the audit committees of two public companies other than the two Registrants does not impair his ability to effectively serve on the Audit Committees of the Registrants, for the following reasons:

               Fees payable to the Registrants’ independent auditor, PricewaterhouseCoopers, LLP for the years ended December 31, 2005, and December 31, 2004, totaled $2,142,140 and $1,898,000, respectively, as detailed in the following table:

The nature of the services provided by PricewaterhouseCoopers LLP under each of the categories indicated in the table is described below.

Audit fees were for professional services rendered by PricewaterhouseCoopers LLP for the audit of the Registrants’ annual financial statements and services provided in connection with statutory and regulatory filings or engagements.

Audit-related fees were for assurance and related services reasonably related to the performance of the audit or review of the annual statements and are not reported under “Audit Fees” above. These services consisted of: special attest services as required by various government entities; accounting consultations and special audits in connection with acquisitions; the audit of financial statements of certain subsidiaries and of various pension and benefits plans

of the Registrants; assistance with prospectus filings; access fees for technical accounting database resources; and assistance with preparations for compliance with section 404 of theSarbanes-Oxley Act of 2002.

Tax fees were for tax compliance, tax advice and tax planning professional services. These services consisted of: tax compliance including the review of tax returns; assistance with questions regarding tax audits, the preparation of employee tax returns under the Registrants’ expatriate tax services program and assistance in completing routine tax schedules and calculations; tax planning and advisory services relating to common forms of domestic and international taxation (i.e. income tax, capital tax, goods and services tax, and valued added tax); and access fees for taxation database resources.

Fees disclosed under this category were for products and services other than those described under “Audit Fees”, “Audit-Related Fees” and “Tax Fees” above. In 2005 and 2004, there were no services in the category.

               The Audit Committees have adopted a written policy governing the pre-approval of audit and non-audit services to be provided to the Registrants by their independent auditors. The policy is reviewed and renewed annually and the audit and non-audit services to be provided to the Registrants by their independent auditors, as well as the budgeted amounts for such services, are pre-approved at that time. A report of all such services performed or to be performed by the independent auditors pursuant to the policy must be submitted to the Audit Committees by the Vice-President and Comptroller at least quarterly. Any additional audit or non-audit services to be provided by the independent auditors either not included among the pre-approved services or exceeding the budgeted amount for such pre-approved services by more than 10% must be individually pre-approved by the Audit Committees or their Chairman, who must report all such additional pre-approvals to the Audit Committees at their next meeting following the granting thereof. The independent auditors’ annual audit services engagement terms and fees are subject to the specific pre-approval of the Audit Committees. Non-audit services that the Registrants’ independent auditors are prohibited from providing to the Registrants may not be pre-approved. In addition, prior to the granting of any pre-approval, the Audit Committees or their Chairman, as the case may be, must be satisfied that the performance of the services in question will not compromise the independence of the independent auditors. Compliance with this policy is monitored by the Registrants’ Director, Internal Audit.

               A description of the Registrants’ off-balance sheet arrangements is set forth on pages 33 and 34 of the Registrants’ 2005 Annual Report incorporated by reference and included herein.

               The table setting forth the Registrants’ contractual commitments is set forth on page 34 of the Registrants’ 2005 Annual Report incorporated by reference and included herein.

A.     Undertaking

               Each Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities.

B.     Consent to Service of Process

               A Form F-X signed by Canadian Pacific Railway Limited and its agent for service of process was filed with the Commission together with Canadian Pacific Railway Limited’s Annual Report on Form 40-F for the fiscal year ended December 31, 2000. A Form F-X signed by Canadian Pacific Railway Company and its agent for service of process was filed with the Commission on April 21, 2004.

               Pursuant to the requirements of the Exchange Act, each Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this Annual Report on Form 40-F to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Calgary, Province of Alberta, Canada.

All dollar amounts in this Annual Information Form (“AIF”) are in Canadian dollars, unless otherwise noted.

Canadian Pacific Railway Limited (“the Company” or “CPR”) was incorporated on June 22, 2001, as 3913732 Canada Inc. pursuant to the Canada Business Corporations Act (“the CBCA”). On July 20, 2001, CPR amended its Articles of Incorporation to change its name to Canadian Pacific Railway Limited. On October 1, 2001, Canadian Pacific Limited (“CPL”) completed an arrangement (“the Arrangement”) whereby it distributed to its common shareholders all of the shares of newly formed corporations holding the assets of four of CPL’s five primary operating divisions. The Arrangement was effected as an arrangement pursuant to section 192 of the CBCA. On September 26, 2001, the Arrangement was approved by the shareholders of CPL, and CPRC, previously a wholly owned subsidiary of CPL, was transferred to CPR, effective October 1, 2001. The transfer was accomplished as part of a series of steps, pursuant to the terms of the Arrangement, whereby CPL transferred all of its outstanding shares of CPRC to a CPL subsidiary, 3921760 Canada Inc. (“3921760”). CPL then transferred all of its outstanding shares of 3921760 to CPR, and CPR amalgamated with 3921760.

Our registered office, executive offices and principal place of business are located at Suite 500, 401 - 9th Avenue S.W., Calgary, Alberta T2P 4Z4.

The table below sets out our principal subsidiaries, including the jurisdiction of incorporation and the percentage of voting and non-voting securities we currently own directly or indirectly:

We continually seek to grow the value and scale of our core business through infrastructure-sharing and joint-service programs with other railways, strategic capital investment programs, and operating plan strategies. Combined with the ongoing improvement of our locomotive fleet, these strategies facilitate more predictable and fluid train operations between major terminals.

In January 2006, CPR and Canadian National Railway Company (“CN”) entered into an agreement, which assists in the optimization of railway infrastructure in the lower mainland of British Columbia (“B.C.”) Under the arrangement, we will operate the trains of both railways using CPR crews from Boston Bar, B.C. (60 km east of Hope), to the terminals on the south shore of Burrard Inlet in Vancouver, and return to North Bend (near Boston Bar). CN will operate the trains of both railways using CN crews from Boston Bar to the terminals on the north shore of Burrard Inlet and return to North Bend. We will provide all switching on the south shore of Burrard Inlet (with the exception of the Burlington Northern Santa Fe Railway barge slip) and CN will provide all switching on the north shore of Burrard Inlet. In addition, we will handle the coal trains of both railways from Boston Bar to the Roberts Bank coal port at Delta, B.C., and return to North Bend.

In 2005, a significant investment was made in the western portion of our rail network to improve trade and capacity between the Port of Vancouver in B.C. and the Canadian prairies. Western commodities, such as coal from the B.C. interior, and grain, sulphur and fertilizers from the prairies, are being transported to the West Coast of Canada in growing volumes. Similarly, increased trade with China and other Asian countries generates additional volumes of containerized freight in this region. We expanded train capacity on our western rail network by 12%, or approximately four extra trains per day. The expansion work was completed on time and within budget. It included:

A siding is a limited length of track parallel to the main line which enables trains running in either direction to pass each other. Longer sidings permit the use of longer trains, resulting in more freight moved per train and fewer trains required to move the same volume of freight traffic. Longer sidings also reduce the number of locomotives required to move the same amount of freight in a given rail corridor. We have identified other corridor bottlenecks on our network and a plan is in place to provide appropriate capacity in order to increase train density and capacity on all of our major routes.

In November 2005, we executed an agreement to sell to Indiana Rail Road Company our 92.3-mile Latta subdivision in Indiana between Bedford and Fayette, near Terre Haute. The sale is expected to close in the first half of 2006, subject to the approval of the U.S. Surface Transportation Board (“STB”). The sale includes trackage rights over CSX Transportation, Inc. (“CSX”) rail lines from Chicago, Illinois, to Terre Haute, Indiana, and from Bedford to New Albany in Indiana, and over the Norfolk Southern Railway (“NS”) line from New Albany to Louisville, Kentucky.

In 2004, we entered into an agreement with CN and NS to provide a significantly shorter, more direct routing over our Delaware and Hudson Railway Company, Inc. (“D&H”) lines for NS-CN interline traffic moving between eastern Canada and the eastern U.S. Under the agreement:

The agreement generated approximately one train per day of new business in each direction, seven days a week on the D&H. This arrangement is improving traffic density and providing additional revenue.

On June 30, 2004, we entered into a Memorandum of Understanding with NS in an effort to improve the efficiency of railway operations and enhance rail service to customers of the D&H. Definitive agreements were reached, providing for:

Operations under the agreements have commenced, and the last of the associated regulatory exemptions were obtained from the STB in the second quarter of 2005. We are now realizing the benefits and savings from these agreements.

In 2003, we extended remote-control locomotive operations, using Locotrol^® technology, to encompass the region between Moose Jaw, Saskatchewan, and Toronto, Ontario, and extended the use of Locotrol^® to intermodal and mixed-freight trains, from bulk trains. As a result, we became the first railway in Canada to operate intermodal freight trains with mid-train remote-control locomotives. Remote-control locomotives enable us to run intermodal trains approaching three kilometres in length year-round. Previously, trains had to be shortened in cold temperatures to prevent loss of air brake pressure.

We also completed in 2003 a $25-million capital investment to extend the length of 16 rail sidings in northern and eastern Ontario to increase operating efficiency and reduce costs. Also in 2003, we sold to CN our Edmunston Spur, a lower-density 7.8-mile rail line in northern New Brunswick. This line runs between Grand Falls and Cyr Junction, near St. Leonard. We also sold our Wisconsin & Southern Railroad, a 32.5-mile line in Wisconsin that runs from Madison to Watertown.

CPRC was incorporated by Letters Patent in 1881 pursuant to an Act of the Parliament of Canada. CPRC is one of Canada’s oldest corporations and was North America’s first transcontinental railway. From our inception 125 years ago, we have developed into a fully-integrated and technologically advanced Class 1 railway (a railroad earning a minimum of US$258.5 million in revenues annually) providing rail and intermodal freight transportation services over a 13,600-mile network serving the principal business centres of Canada, from Montreal, Quebec, to Vancouver, B.C., and the U.S. Midwest and Northeast regions.

We own approximately 9,300 miles of track. An additional 4,300 miles of track are jointly owned, leased or operated under trackage rights. Of the total mileage operated, approximately 6,650 miles are located in western Canada, 2,200 miles in eastern Canada, 3,250 miles in the U.S. Midwest and 1,500 miles in the U.S. Northeast. Our business is based on funnelling railway traffic from feeder lines and connectors, including secondary and branch lines, onto our high-density mainline railway network. We have extended our network reach by establishing alliances and connections with other major Class 1 railways in North America, which allow us to provide competitive services and access to markets across North America beyond our own rail network. We also provide service to markets in Europe and the Pacific Rim through direct access to the Port of Montreal, Quebec, and the Port of Vancouver, respectively.

Our network accesses the U.S. market directly through two wholly owned subsidiaries: Soo Line Railroad Company (“Soo Line”), a Class 1 railway operating in the U.S. Midwest; and the D&H, which operates between eastern Canada and major U.S. Northeast markets, including New York City, New York; Philadelphia, Pennsylvania; and Washington, D.C.

Our objective is to create long-term value for customers, shareholders, communities and employees, primarily by profitably growing within the footprint of our core rail franchise. We seek to accomplish this objective through the following three-part strategy:

Some customers’ goods may have to travel on more than one railway to reach their final destination. The transfer of goods from railway to railway can cause delays and service interruptions. Our rail network connects to other North American rail carriers and, through partnerships, we continue to co-develop processes and products designed to provide seamless and efficient scheduled train service to these customers.

We continue to increase the capacity and efficiency of our core franchise through infrastructure-sharing and joint-service programs with other railways and third parties, strategic capital investment programs, and operating plan strategies. Combined with the continued improvement of our locomotive fleet, these strategies enable us to achieve more predictable and fluid train operations between major terminals.

Recent Class 1 railway initiatives include:

We also develop mutually beneficial arrangements with smaller railways, including shortline and regional carriers.

In November 2005, CPR and the Fraser River Port Authority (“FRPA”) entered into a cooperation agreement to enhance service through the Fraser River port, south of the Port of Vancouver, and capture growth opportunities in global trade. Under the agreement, CPR and FRPA will consult on market and trade outlooks and business development opportunities, coordinate investments, and engage in multi-modal planning to build or expand port and rail infrastructure, such as terminals and track. FRPA will also support efforts to enhance our access to Fraser River facilities to help meet increased demand for rail service.

In April 2005, we signed a cooperation agreement with the Vancouver Port Authority (“VPA”) to work on joint capacity developments to more fully capture expanding Asia-Pacific trade opportunities. Joint initiatives include marketing programs and domestic public policy advocacy to increase competitiveness, operational efficiencies and customer service at the Port of Vancouver. There is also a commitment by both parties to ensure that the Port of Vancouver is the most secure port system on the West Coast of the Americas. CPR and VPA will also advocate a policy framework in Canada that fosters private sector investment in an integrated transportation system, including marine, rail, road and air, and encourages coordinated federal and provincial investment in Canada’s aging transportation network in local communities.

Our 13,600-mile network extends from the Port of Vancouver on Canada’s Pacific Coast to the Port of Montreal in eastern Canada, and to the U.S. industrial centres of Chicago, Illinois; Newark, New Jersey; Philadelphia, Pennsylvania; and New York City and Buffalo, New York.

Our network is composed of four primary corridors: Western, Southern, Central, and Eastern. These corridors are comprised of main lines, totalling approximately 4,750 miles, supported by secondary and branch rail lines (“feeder lines”) that carry traffic to and from the main lines.

Overview — The Western Corridor links Vancouver with Moose Jaw, which is the western Canadian terminus of our Southern and Central corridors. With service through Calgary the Western Corridor is an important part of our routes between Vancouver and the U.S. Midwest, and between Vancouver and central and eastern Canada.

Products — The Western Corridor is our primary route for bulk and resource products traffic from western Canada to the Port of Vancouver for export. We also handle significant volumes of international intermodal containers and domestic general merchandise traffic.

Feeder Lines — We support our Western Corridor with three significant feeder lines. The “Coal Route” links southeastern B.C. coal deposits to the Western Corridor and to the Roberts Bank terminal at the Port of Vancouver. The “Calgary-Edmonton- Scotford Route” provides rail access to central Alberta’s petrochemical industries and natural resources markets. The “Pacific CanAm Route” connects Calgary and Medicine Hat, Alberta, with Union Pacific Railroad Company (“UP”) at Kingsgate, B.C.

Connections — Our Western Corridor connects with UP at Kingsgate and with Burlington Northern Santa Fe Railway (“BNSF”) at Coutts, Alberta, and at New Westminster and Huntingdon in B.C. This corridor also connects with CN at Red Deer, Alberta; Calgary; Edmonton; Kamloops; and several locations in the Vancouver Area.

Yards and Repair Facilities — We support rail operations on the Western Corridor with main rail yards at Vancouver, Calgary, Edmonton and Moose Jaw. We also have major intermodal terminals at Vancouver, Calgary and Edmonton, and locomotive and rail car repair facilities at Golden, B.C., Vancouver, Calgary and Moose Jaw.

Other — In 2005, we completed a series of capacity expansion projects in the Western Corridor, which increased capacity in this corridor by approximately four trains per day. These projects are discussed further in the section “General Development of the Business” in this AIF.

Overview — The Southern Corridor connects with the Western Corridor at Moose Jaw. By running south to Chicago through the twin cities of Minneapolis and St. Paul in Minnesota, and through Milwaukee, Wisconsin, we provide a direct, single-carrier route between western Canada and the U.S. Midwest.

Products — Primary traffic categories transported on the Southern Corridor include intermodal containers from the Port of Vancouver, Canadian fertilizers, chemicals, grain, coal, and automotive and U.S. agricultural products.

Feeder Lines — We support the Southern Corridor with a major feeder line connecting Glenwood, Minnesota, and Winnipeg, Manitoba. This line is both a gathering network for U.S. grain and a route for Canadian fertilizers and merchandise traffic destined to the U.S.

We have operating rights over the BNSF line between Minneapolis and the twin ports of Duluth, Minnesota, and Superior, Wisconsin. This line provides an outlet for grain from the U.S. Midwest to the grain terminals at these ports.

We also provide service on a route from Chicago to Louisville, Kentucky, through a combination of operating rights and owned lines. General merchandise traffic and a significant amount of coal traffic from mines in southern Indiana move over this route, which is the subject of a sale to the Indiana Rail Road Company (discussed further in the “General Development of the Business” section of this AIF).

Connections — Our Southern Corridor connects with all major railways at Chicago. Outside of Chicago, we have major connections with BNSF at Minneapolis and at Minot, North Dakota; with UP at St. Paul; and with CSX and NS at Louisville. We also connect with CN at Minneapolis, Milwaukee and Chicago. Our Southern Corridor also links to several shortline railways that primarily serve grain and coal producing areas in the U.S.

Yards and Repair Facilities — We support rail operations on the Southern Corridor with main rail yards in Chicago, St. Paul and Glenwood. We own 49% of the Indiana Harbor Belt Railroad Company, a switching railway serving Greater Chicago and northwest Indiana, and have two major intermodal terminals in Chicago and one in Minneapolis. In addition, we have a major locomotive repair facility at St. Paul and car repair facilities at St. Paul and Chicago.

Overview — The Central Corridor extends from Moose Jaw through Winnipeg to its eastern terminus at Toronto. We complement the Central Corridor with a secondary route in Ontario that is leased and operated by Ottawa Valley Railway. This secondary route connects Sudbury and Smiths Falls, Ontario, and expedites the movement of our traffic between Montreal and western Canada. Our Central Corridor provides shippers direct rail service from Toronto and Montreal to Calgary and Vancouver via our Western Corridor. This is a key element of our transcontinental intermodal and other services. The Central Corridor also provides access to the Port of Thunder Bay, Ontario, Canada’s primary Great Lakes bulk terminal.

Products — Major traffic categories transported on the Central Corridor include Canadian grain, coal, forest and industrial and consumer products, intermodal containers, automotive products and general merchandise.

Feeder Lines — We support the Central Corridor with a main feeder line connecting Edmonton with Winnipeg, through Saskatoon and Regina in Saskatchewan. This line is an important collector of Canadian grain and fertilizer.

Connections — The Central Corridor connects with BNSF at Emerson, Manitoba, and with a number of shortline railways. This corridor also connects with CN at Regina, Saskatoon, Winnipeg, Thunder Bay and Sudbury.

Yards and Repair Facilities — We support our rail operations on the Central Corridor with major rail yards at Saskatoon, Winnipeg, Toronto and Thunder Bay. Our largest intermodal facility is located in the northern Toronto suburb of Vaughan and serves the Greater Toronto and southwestern Ontario areas. We also operate intermodal terminals at Thunder Bay, Winnipeg, Saskatoon and Regina.

We have major locomotive repair facilities at Winnipeg and Toronto and car repair facilities at Winnipeg, Thunder Bay and Toronto.

Overview — The Eastern Corridor provides an important link between the major population centres of eastern Canada, the U.S. Midwest and the U.S. Northeast. The corridor supports our market position at the Port of Montreal by providing one of the shortest rail routes for European cargo destined to the U.S. Midwest. The Eastern Corridor consists of a route between Montreal and Detroit, which we own and maintain, coupled with a trackage rights arrangement on NS track between Detroit and Chicago and a long-term rail car haulage contract with CSX that links Detroit with our lines in Chicago.

Products — Major traffic categories transported on the Eastern Corridor include intermodal containers, automotive, and forest and industrial and consumer products, as well as truck trailers moving in roll-on/roll-off Expressway service between Montreal and Toronto.

Feeder Lines — The Eastern Corridor connects with important feeder lines. Our route between Montreal and Sunbury, Pennsylvania, in combination with trackage rights over other railways, provides us with direct access to New York City; Albany, New York; Philadelphia; Newark, New Jersey; and Washington, D.C. The line between Guelph Junction, Ontario and Binghamton, including haulage rights over NS lines, links industrial southern Ontario with key U.S. connecting rail carriers at Buffalo and with the Montreal-to-Sunbury line at Binghamton.

Connections — The Eastern Corridor connects with all major railways at Chicago. We also have major connections with NS at Detroit, Buffalo, and at Harrisburg and Allentown in Pennsylvania, and with CSX at Detroit, Buffalo, Albany, Philadelphia, and Washington D.C. In addition, our eastern corridor connects with CN at Montreal,Toronto, Windsor and London, Ontario.

Yards and Repair Facilities — We support our Eastern Corridor with major rail yards and terminals in Chicago, Toronto, Montreal and Binghamton. There are also have intermodal facilities in Montreal and Detroit, as well as a second intermodal facility in Toronto dedicated to serving the Eastern Corridor. Terminals for our Expressway service are located in Montreal and at Milton and Agincourt in the Greater Toronto area. In addition to repair facilities in Toronto and Chicago, we have locomotive and car repair facilities in Montreal and Binghamton.

Other — We announced on June 30, 2004, a restructuring of the D&H whereby D&H and NS provide yard and haulage services for each other under an agreement (discussed further in the section “General Development of the Business” in this AIF) This restructuring has reduced costs and provided new income for the D&H. The STB in the second quarter of 2005 approved the final changes stemming from the agreement.

Our rail network is standard gauge, which is used by all of the major railways in Canada, the U.S. and Mexico. Continuous welded rail is used on almost all of our mainline. Virtually all of the network and primary feeder trackage is 100-pound or heavier rail, suitable for the movement of 286,000-pound cars.

We use different train control systems on portions of our owned track, depending on the volume of rail traffic. Centralized traffic control signals are used to authorize the movement of trains where traffic is heaviest.

Where rail traffic is lightest, train movements are directed by written instructions transmitted electronically and by radio from rail traffic controllers to train crews. In areas of intermediate traffic density, we use an automatic block signalling system in conjunction with written instructions from rail traffic controllers.

The following table compares the percentage of our total freight revenue derived from each of our major business lines in 2005 compared with 2004.

The following table summarizes our freight revenues since 2003:

Our bulk business represented approximately 45% of total freight revenues in 2005.

Our grain business comprised approximately 18% of total freight revenues in 2005.

Grain transported by CPR consists of both whole grains, including wheat, corn, soybeans and canola, and processed products, such as canola meal, vegetable oil and flour.

Our grain business is centred in two key agricultural areas: the Canadian prairies (Alberta, Saskatchewan and Manitoba) and the Northern Plains states of North Dakota and Minnesota. Western Canadian grain is shipped primarily west to the Port of Vancouver and east to Thunder Bay for export. Grain is also shipped to the U.S. Midwest and to eastern Canada for domestic consumption. U.S.-originated export grain traffic is shipped to ports at Duluth and Superior. In partnership with other railways, we also move grain to export terminals in the U.S. Pacific Northwest and the Gulf of Mexico. Grain destined for domestic consumption moves east via Chicago to the U.S. Northeast or is interchanged with other carriers to the U.S. Southeast, Pacific Northwest and California markets.

Railway rates for the movement of export grain in western Canada are subject to special legislative provisions. These provisions apply to defined commodities and origin/destination pairings set out in the Canada Transportation Act (“CTA”). The revenue

formula included in the CTA is indexed annually to reflect changes in the input costs associated with transporting grain destined for export markets. For additional information, refer to the “Regulation and Other Issues” section in this AIF.

Our coal businesses represented approximately 17% of total freight revenues in 2005.

Most of the coal we handle is metallurgical and destined for export through the Port of Vancouver for use in the steel-making process in the Pacific Rim, Europe and South America.

Our Canadian coal traffic originates mainly from mines in southeastern B.C. They are considered to be among the most productive, highest-quality metallurgical coal mines in the world. We move coal west from these mines to port terminals for export to world markets, and east for consumption in steel-making mills along the Great Lakes.

In the U.S., we move primarily thermal coal from the Powder River and Illinois Basins for use in power-generating plants. Our U.S. coal business also includes petroleum coke shipments to power-generating facilities.

Sulphur and fertilizers business represented approximately 10% of total freight revenues in 2005.

Most sulphur produced in Alberta is a by-product of processing sour natural gas, refining crude oil and upgrading bitumen produced in the Alberta oil sands. Sulphur is a raw material used primarily in the manufacture of sulphuric acid, the most common industrial chemical in the world. Sulphuric acid is used most extensively in the production of phosphate fertilizers, and demand for elemental sulphur rises with demand for fertilizers. Sulphuric acid is also a key ingredient in industrial processes ranging from smelting and nickel leaching to paper production.

Alberta’s oil and gas industry produces over eight million tonnes of sulphur annually. We transport approximately half of the sulphur that enters international markets from Canada and we are the leading transporter of formed sulphur shipped from gas plants in southern Alberta to the Port of Vancouver. The two largest shipping points in southern Alberta are Shantz and Waterton and both are located on our rail lines. Currently, our export traffic is mainly destined to China, Australia and the U.S. In addition, we transport liquid sulphur out of Scotford, Alberta, site of one of the largest oil sands projects in the Edmonton area, and from other origins to the southeastern and northwestern U.S. for use in the fertilizer industry.

Fertilizers traffic consists primarily of potash and chemical fertilizers. Our potash traffic moves mainly from Saskatchewan to markets in the U.S. and to offshore markets through the ports of Vancouver, Thunder Bay and Portland, Oregon. Chemical fertilizers are transported to markets in Canada and the northwestern U.S. from key production areas in the Canadian prairies. Phosphate fertilizer is also transported from U.S. and Canadian producers to markets in Canada and the northern U.S.

We provide transportation services from major potash and nitrogen production facilities in western Canada and have the most efficient routes to the major U.S. markets. We also have direct service to key fertilizer distribution terminals, such as the barge facilities on the Mississippi River system at Minneapolis-St. Paul and in the Louisville region, as well as access to Great Lakes vessels at Thunder Bay.

Our merchandise business represented approximately 28% of total freight revenues in 2005.

Merchandise products move in trains of mixed freight and in a variety of car types and service involves delivering products to many different customers and destinations.

We move large volumes of merchandise traffic through a network of truck-rail transload facilities managed by our Canadian Pacific Logistics Solutions (“CPLS”) division, which provides simplified logistics solutions tailored to resolve complex supply chain issues.

Our forest products business represented approximately 8% of total freight revenues in 2005.

Forest products traffic includes wood pulp, paper, paperboard, newsprint, lumber, panel and Oriented Strand Board shipped from key producing areas in B.C., northern Alberta, northern Saskatchewan, Ontario and Quebec to destinations throughout North America.

Our industrial and consumer products business represented approximately 13% of total freight revenues in 2005.

Industrial and consumer products traffic includes an array of commodities grouped as plastics, aggregates, minerals, metals, steel, chemicals and energy-related products.

Our industrial and consumer products traffic is widely dispersed throughout North America, with large bases in Alberta, Ontario, Quebec and the U.S. Midwest. The location of mines, steel mills and aggregate facilities adjacent to our rail lines provides for the convenient shipment of a diverse group of industrial products for a wide range of customers. We transport products to destinations throughout North America and to and from ports. We also participate in the movement of products from the U.S. to Canadian destinations, including chemicals originating in and around the Gulf Coast and destined to points in eastern Canada.

Our automotive business represented approximately 7% of total freight revenues in 2005.

Automotive traffic includes domestic, import and pre-owned vehicles and automotive parts. We transport finished vehicles from U.S. and Canadian assembly plants to the Canadian marketplace, and to other markets throughout North America via major interchanges at Detroit, Chicago and Buffalo. A comprehensive network of automotive compounds is utilized to facilitate final delivery of vehicles to dealers throughout Canada, in Minnesota and in the U.S. Northeast. We also move imported vehicles from the Port of Vancouver to retail markets in eastern and western Canada.

Our intermodal business accounted for approximately 27% of total freight revenues in 2005.

Domestic intermodal freight is comprised primarily of manufactured consumer products moving in containers.

International intermodal freight moves in marine containers between ports and North American inland markets.

Our domestic intermodal segment consists primarily of long-haul intra-Canada and cross-border business. Key service factors in domestic intermodal include consistent on-time delivery, the ability to provide door-to-door service and the availability of value-added services. The majority of our domestic intermodal business originates in Canada where we market our services directly to retailers, providing complete door-to-door service and maintaining direct relationships with our customers. In the U.S., our service is delivered mainly through wholesalers.

Our international intermodal business consists primarily of containerized traffic moving between the ports of Vancouver, Montreal, New York and Philadelphia and inland points across Canada and the U.S.

We are a major carrier of containers moving via the ports of Montreal and Vancouver. Import traffic from the Port of Vancouver is mainly long-haul business destined for eastern Canada and the U.S. Midwest and Northeast, and our trans-Pacific service offers the shortest route between the Port of Vancouver and Chicago. We work closely with the Port of Montreal, a major year-round East Coast gateway to Europe, to serve markets primarily in Canada and the U.S. Midwest. Our U.S. Northeast service connects eastern Canada with the ports of Philadelphia and New York, offering a competitive alternative to trucks.

Recent investments in terminals and track infrastructure, and operating and service initiatives have enhanced our strategic position for future growth.

Expressway is an innovative intermodal transportation service operating in the Montreal-Toronto corridor. It works in partnership with the trucking industry providing service to motor carriers and private fleet operators. Expressway uses a flexible drive-on/drive-off ramp system and can handle a wide variety of trailers on specialized platforms in dedicated trains.

Our customers demand competitively priced transportation service and many compete in global markets. In order to offer competitive prices to our customers, we have redesigned our train operations and terminal processes. We are also continually striving to increase productivity through cost-reduction programs and to improve asset utilization through initiatives aimed at targeted growth, product efficiency and maximizing value from existing resources. A key initiative, undertaken by our yield management team, has been to standardize our price and yield business processes.

We earn additional revenues through the sale or lease of assets. These arrangements include infrastructure and operating agreements with government-sponsored commuter rail authorities, the sale of our rights to lay fibre optic cable along our right-of-way, and contracts with passenger service operators. We also operate the “Royal Canadian Pacific”, a luxury passenger train comprised of our vintage business car fleet.

At December 31, 2005, one customer comprised 14.5% of total revenues and 8.0% of our total accounts receivable. At December 31, 2004, one customer comprised 11.7% of total revenues and 12.4% of our total accounts receivable. In 2003, we did not generate more than 10% of our revenues from any single customer.

We focus on franchise investment, increasing network efficiency and improving asset utilization, train operations productivity and labour productivity. The following table summarizes the effect of these strategies on industry-recognized performance indicators:

Franchise investment is an integral part of our multi-year capital program and supports our growth initiatives. Our annual capital program typically includes investments in track and facilities (including rail yards and intermodal terminals); locomotives; information technology; and freight cars and other equipment.

We invested approximately $2.3 billion in our core assets from 2003 to 2005, with annual capital spending over this period averaging approximately 19% of revenues. This included approximately $1.5 billion invested in track and facilities, $0.3 billion in locomotives, $0.2 billion in information technology and $0.3 billion in freight cars and other equipment.

We continue to upgrade our locomotive fleet by acquiring high-adhesion alternating current (“AC”) locomotives, which are more fuel efficient and reliable and have superior haulage capacity compared with standard direct current (“DC”) locomotives. Our locomotive fleet now includes 642 AC locomotives. While AC locomotives represent approximately 56% of our road-freight locomotive fleet, they handle about 80% of our workload. Our investment in AC locomotives has helped to improve service reliability and generate cost savings in fuel, equipment rents and maintenance. It has also allowed us to remove from service 844 older locomotives and to more efficiently utilize our repair and maintenance facilities.

Following is a synopsis of our owned and leased locomotive fleet:

We own or lease approximately 52,000 freight cars, of which we own approximately 23,000 and 7,400 are hopper cars owned by Canadian federal and provincial government agencies. Long-term leases on approximately 4,000 cars are scheduled to expire during 2006, and the leases on approximately 10,400 additional cars are scheduled to expire before the end of 2009.

Our covered hopper car fleet, used for transporting grain, consists of owned and leased cars. A portion of the fleet used for the export of grain is leased from the Government of Canada, which has announced its intention to transfer ownership of its cars to the Farmer Rail Car Coalition. However, the transfer remains subject to final reviews by the Canadian government and the timing and terms of the transfer having yet to be determined. Regardless of ownership, we will seek to continue leasing these cars under commercial terms that support an efficient low-cost grain handling and transportation system.

Our Integrated Operating Plan (“IOP”) is the foundation for our scheduled railway operations that strive to generate quality service for customers and improve asset utilization to achieve high levels of efficiency.

Scheduled operations are key to making connections at intermediate terminals and meeting delivery commitments.

Under our IOP, trains are scheduled to run consistently at times agreed upon with our customers. To accomplish this, we establish a plan for each rail car that covers its entire trip from point of origin to final destination. Cars with similar destinations are consolidated into blocks. This reduces delays at intermediate locations by simplifying processes for employees, eliminating the duplication of work and helping to ensure traffic moves fluidly through rail yards and terminals.

These measures improve transit times for shipments throughout our network and increase car availability for customers. Our IOP also increases efficiency by more effectively scheduling employee shifts, locomotive maintenance, track repair and material supply.

We have capitalized on the new capabilities of our network, our upgraded locomotive fleet and the IOP to operate longer and heavier trains. This has reduced associated expenses, simplified the departure of shipments from points of origin and provided lower-cost capacity for growth.

We are committed to continuously improve scheduled railway operations as a means to achieve further efficiencies that will enable further growth without the need to incur significant capital expenditures to accommodate the growth.

As a 24-hour-a-day, 7-day-a-week business, we rely heavily on our computer systems to schedule all components of our operations. Computer applications map out complex interconnections of freight cars, locomotives, facilities, track and train crews to meet more than 10,000 individual customer service commitments every day. We use an intricate automated traffic forecasting system that determines freight car routings and the workload in our yards by using sophisticated, industry-specific software and generating time-distance diagrams to examine track capacity.

During 2005, we completed the implementation of TYES, a new yard management system. Using waybill information, TYES triggers classification instructions to the computer system in our yards so that individual shipments are matched to freight-car

blocks, which in turn are matched to trains. A trip plan is created for each customer’s shipment and integrated with train planning and yard applications to ensure that the instructions issued for the customer’s shipment are consistent with the information given to the customer. With TYES now fully implemented, we have completed our Service Excellence suite of operating systems. These operating systems manage the overall movement of our customers’ shipments and provide railway managers with highly reliable data on shipment performance, transit times, connections with other trains, train and yard capacities, and locomotive requirements. This data is used to make adjustments to the IOP to achieve specific service and productivity targets and ensure all design objectives are fulfilled.

We plan to commence implementation of the TRIEX system during 2006 to further improve our intermodal service offering. TRIEX will provide a customer self-service offering, including reservations, proof of delivery and full shipment tracking. TRIEX will also give us the means to have more sophisticated pricing options and simplify our billing processes.

During 2005, we signed a license agreement with SAP Canada to leverage use of its software beyond managing assets and expenditures to other areas, such as revenue management, supplier management and pricing.

In addition, with the outsourcing of a substantial amount of our information technology infrastructure to world-class service providers, our information technology focus is on leveraging information and applications to improve railway productivity and obtaining more value from our existing assets and resources.

We continually take steps to improve the effectiveness of our organizational structure in order to increase productivity and efficiency. Since 1996, we have improved communication and decision-making, simplified the organization’s management structure, and increased the responsibility given to management personnel. We regularly review our organizational processes, workforce needs and related organizational costs with a focus on improving the productivity and efficiency of our workforce while reducing expenses.

In the second quarter of 2003, we began a program to eliminate 820 positions by consolidating administrative functions, applying new information technology to increase productivity in administrative areas and yard operations, and to increase car and locomotive maintenance efficiency. The originally targeted 820 reductions were substantially completed by the end of 2005.

In the fourth quarter of 2005, we began a restructuring initiative to further improve efficiency in our administrative areas. This initiative is expected to eliminate approximately 400 management and administration positions. As part of this initiative, we introduced a voluntary incentive retirement program for long-service employees in Canada. The majority of the reductions are expected to be complete by the end of the first quarter of 2006.

In order to stimulate and reward employee participation in our efficiency initiatives, we have implemented a number of incentive-based compensation programs designed to allow eligible unionized and non-unionized to share in the profits they help generate.

The freight transportation industry is highly competitive. We face intense competition for freight transportation in Canada and the U.S., including competition from other railways and trucking companies. We are subject to competition for freight traffic from other Class 1 railways, particularly BNSF, CN, CSX, NS and UP. Competition is based mainly on price, quality of service and access to markets. Competition with the trucking industry is generally based on freight rates, flexibility of service and transit time performance. Any improvement in the cost structure or service of our competitors could increase competition and have a materially adverse effect on our business or operating results.

There was significant consolidation of the railway industry in North America during the 1990s, which led to larger railway companies. These companies offer services in large market areas and compete with us in these markets. Increased competition from current and future competitors in the railway industry could adversely affect our competitive position, financial condition and operating results.

Our freight volumes and revenues are largely dependent upon the health of the North American and global economies and other factors affecting the volumes and patterns of international trade. We are also sensitive to factors such as weather, security threats, commodity pricing and global supply and demand, as well as those affecting North America’s agricultural, mining, forest products, consumer products, import/export and automotive sectors. These factors are beyond the influence or control of the railway industry generally and CPR specifically.

Fuel expense constitutes a significant portion of our operating costs. Fuel price volatility can, therefore, have a material effect on operating results. Prices can be influenced by local and international supply disruptions stemming from the loss of crude oil production or refining capacity. These disruptions can be caused by weather conditions, unplanned infrastructure failures or geopolitical events. We employ a fuel surcharge program to manage our exposure to price fluctuations. Our fuel surcharge program partially offsets fuel cost increases by levying an incremental charge on dollar revenue. In addition to the fuel surcharge, we may from time to time sell or purchase crude-related derivative instruments. To the extent that fuel costs decline below the levels specified in any such derivative instrument, we will not receive the full benefit of the reduction.

We conduct our business and receive revenues primarily in Canadian dollars, however, a significant portion of our revenues, expenses, assets and debt are denominated in U.S. dollars. Thus, our results are affected by fluctuations in the exchange rate between these currencies. In addition, changes in the exchange rate between the Canadian dollar and other currencies (including the U.S. dollar) affect the competitiveness in world markets of the goods we transport and, in turn, positively or negatively affect our revenues and expenses. From time to time we may sell or purchase forward U.S. dollars at fixed rates in future periods to manage our exposure to fluctuations in exchange rates between Canadian and U.S. dollars on future revenue streams and certain U.S. dollar expenditures. To the extent that exchange rates decline below the rate fixed by such futures contracts, we will not receive the full benefit of these contracts.

We may enter into long-term debt agreements to finance capital purchases when we do not have the outright free cash to purchase the capital assets, or if we elect to utilize cash for other purposes. By doing so, we expose ourselves to increased interest costs on future fixed-debt instruments and existing variable rate debt instruments should market interest rates increase. In addition, the present value of our assets and liabilities will also vary with interest rate changes. We may enter into forward rate agreements (“Interest or Treasury Locks”) to lock in rates for a future date, thereby gaining protection from any subsequent interest rate increases. We may also enter into swap agreements whereby one party agrees to pay a fixed rate of interest while the other party pays a floating rate. We may incur higher costs, depending on the direction of interest rates and on our contracted rate.

Our railway operations in Canada are subject to regulations under the CTA, the Railway Safety Actand certain other statutes administered by the Canadian Transportation Agency and the federal Minister of Transport. Our U.S. railway operations are subject to regulation by the STB and the Federal Railroad Administration (“FRA”). We are also subject to federal, provincial, state and local laws and regulations dealing with health, security, safety, labour, environmental, rate and other matters, all of which may affect our business or operating results.

In addition, we are subject to statutory and regulatory directives in the U.S. addressing homeland security concerns. Future decisions by the U.S. government on homeland security matters or decisions by the industry in response to security threats to the North American rail network could have a materially adverse effect on our business or operating results.

Our operations and real estate assets are subject to extensive federal, provincial, state and local environmental laws and regulations governing emissions to the air, discharges to waters and the handling, storage, transportation and disposal of waste and other materials. We transport hazardous materials and periodically use hazardous materials in our operations. Any findings that we have violated such laws or regulations could have a materially adverse effect our business or operating results.

In certain locations, we operate on properties that have been used for railways for over a century. As a result, historic releases of hazardous waste or materials may be discovered, requiring remediation of our properties or subjecting us to liability for damages, the cost of which could materially affect our business or operating results. Changing regulations and remedial approaches in Canada and the U.S. will ultimately impact the costs of remediation and overall environmental liability. The regulatory trend towards increased protection of human health from specific chemicals may mean sites that were previously remediated, or that did not require action, could be subject to further scrutiny. There is a possibility that an accidental release of hazardous waste or materials on our properties could occur and the costs of remediation of properties affected by such accidental release could materially affect our business or operating results.

In the operation of a railway, it is possible that derailments or other accidents may occur that could cause harm to human health or to the environment. As a result, we may incur costs in the future to address any such harm, including costs relating to the

performance of clean-ups, natural resource damages and compensatory or punitive damages relating to harm to individuals or property. These costs could materially affect our business or operating results.

Relations with our employees could deteriorate due to disputes related to, among other things, wage or benefit levels or our response to changes in government regulation of workers and the workplace. Our operations rely heavily on our employees. Any labour shortage or stoppage caused by poor relations with employees, including those represented by unions, could adversely affect our ability to provide services and the costs of providing such services, which could materially harm our business or operating results and may materially harm relationships with our customers.

Certain of our union agreements are currently under renegotiation, as discussed in the section “Labour Relations” in this AIF. We cannot guarantee these negotiations will be resolved in a timely manner or on favourable terms.

We maintain defined benefit and defined contribution pension plans. The defined benefit plans’ unfunded liabilities have increased significantly, mainly as a result of current low interest rates. Pension funding requirements are dependent upon different factors, including interest rate levels, asset returns, regulatory requirements for funding purposes, and changes to pension plan benefits. In the absence of favourable changes in these factors, we will have to satisfy the under-funded amounts of our plans through cash contributions from time to time. These cash outlays for funding could materially affect our business.

Pursuant to a trust and custodial services agreement with the trustee of the Canadian Pacific Railway Company Pension Trust Fund, we have undertaken to indemnify and save harmless the trustee, to the extent not paid by the Fund, from any and all taxes, claims, liabilities, damages, costs and expenses arising out of the performance of the trustee’s obligations under the agreement, except as a result of misconduct by the trustee. The indemnity includes liabilities, costs or expenses relating to any legal reporting or notification obligations of the trustee with respect to the defined contribution option of the pension plans or otherwise with respect to the assets of the pension plans that are not part of the Fund. The indemnity survives the termination or expiry of the agreement with respect to claims and liabilities arising prior to the termination or expiry. At December 31, 2005, we had not recorded a liability associated with this indemnification, as we do not expect to make any payments pertaining to it.

Pursuant to our by-laws, we indemnify all our current and former directors and officers. We carry a liability insurance policy for directors and officers, subject to a maximum coverage limit and certain deductibles in cases where a director or officer is reimbursed for any loss covered by the policy.

Safety is a key priority for our management and Board of Directors. We use two key safety indicators, each of which follows strict U.S. FRA reporting guidelines. In 2005, the rate of FRA personal injuries per 200,000 employee hours (100 employee years in 2004) was 2.3, down 15% from 2004 and down 26% from 2003.

The rate of FRA reportable train accidents per million train miles was 2.1 in 2005, unchanged from 2004, and up 17% from 1.8 in 2003. In 2005, improvements in train safety on CPR’s track were offset by an increase in train accidents involving CPR trains while on track owned by other railways. The increase in 2004, compared with 2003, occurred mainly during the first two quarters of 2004, and in particular, during unusually cold weather early in the year.

Our Safety and Health Management Committee provides ongoing focus, leadership, commitment and support for efforts to improve the safety of our operations as well as the safety and health of our employees. The committee is comprised of CPR’s Chief Executive Officer, President and representatives from various operations departments, including safety, environmental and police. Our Safety Framework governs the safety management process, which involves more than 1,000 employees in planning and implementing safety-related activities. This management process, combined with planning that encompasses all operational functions, ensures a continuous and consistent focus on safety.

CPR was the first railway in North America to be approved under a new Canada Border Services Agency (“CBSA”) program to streamline clearance at the border for imports from the U.S. Under the Customs Self-Assessment (“CSA”) program, goods and shippers approved as low risk have a virtual fast lane into Canada on our railway. Eligible goods include finished vehicles, parts for vehicles, food products and other common items frequently imported from the U.S.

The CSA program reduces the cost of compliance with Canada’s import regulations, as approved importers can file monthly summary customs reports on their shipments instead of a report on each shipment. Approved importers also benefit from improved efficiencies, as their goods can be delivered directly to their facilities without stopping for inspection at the border or waiting for customs clearance. We benefit from improved freight car velocity with shipments for customers approved under CSA moving more easily across the border.

We are also a certified carrier with the U.S. Customs and Border Protection’s (“CBP”) Customs - Trade Partnership Against Terrorism (“C-TPAT”) program and the CBSA’s Partners in Protection (“PIP”) program. C-TPAT and PIP are partnership programs that seek to strengthen overall supply chain and border security.

Under a joint Declaration of Principles signed in April 2003, we made a commitment to work with the CBSA and CBP to install a new Vehicle and Cargo Inspection System (“VACIS”) at five of our border crossings. Rail VACIS uses non-intrusive gamma ray technology to scan U.S.-bound rail shipments. All five VACIS systems are now fully operational. The joint government-industry initiative to enhance the security of U.S.-bound rail shipments ensures trade continues to flow between Canada and the U.S. These measures were part of the larger process of implementing the Smart Border Declaration adopted by Canada and the U.S. in December 2001.

Additional work is also being undertaken at Windsor, Ontario, to secure the rail corridor between the Windsor VACIS facility and the U.S. border. Work on this secure corridor initiative is expected to be complete by the end of the first quarter of 2006.

At December 31, 2005, approximately 80% of our workforce was unionized, with approximately 80% of our workforce located in Canada. Unionized employees are represented by a total of 36 bargaining agents. Seven bargaining agents represent our employees in Canada and the remaining 29 represent employees in our U.S. operations.

Agreements are currently in place with five of the seven bargaining units in Canada. In 2005 and early 2006, we negotiated the following settlements with bargaining units in Canada:

Most U.S. Class 1 railroads negotiate labour agreements collectively on a national basis. At the end of 2004, a new round of bargaining commenced with all 13 national unions. There have been no settlements to date. In a new approach, seven unions, including the Teamsters union, which represents locomotive engineers and track maintenance workers, formed a coalition at the national bargaining table. Negotiations with the coalition and with the union representing conductors are currently in mediation.

Several difficult issues, such as health care cost containment, more flexible use of employees and contractors, and the implementation of a single person crew, present significant challenges for the parties.

Soo Line and D&H have elected to negotiate independently of the national bargaining process.

We are party to collective agreements with 29 bargaining units: 15 on the Soo Line and 14 on the D&H.

Agreements with 14 of the 15 bargaining units on the Soo Line are currently open for renegotiation. Our agreement with yard supervisors extends to the end of 2009. Negotiations have commenced with track maintainers, conductors, clerks, car repair employees, mechanical labourers, machinists, electricians, train dispatchers, signal repair employees, police, blacksmiths and boilermakers, sheetmetal workers, and train service employees. Negotiations with the Teamsters, representing locomotive engineers, resulted in both parties agreeing to binding arbitration, which was held in November 2005. An arbitration decision issued January 26, 2006, satisfactorily finalized an agreement.

D&H has agreements in place with 10 unions representing freight car repair employees, clerks, locomotive engineers, signal repair employees, mechanical supervisors, mechanical labourers, machinists, sheet metal workers, electricians, and police. Negotiations are continuing with the remaining four bargaining units, which represent track maintainers, conductors and trainpersons, engineering supervisors, and yard supervisors.

We have implemented a comprehensive Environmental Management System (“EMS”), which uses the five elements of the ISO 14001 standard – policy, planning, implementation and operation, checking and corrective action, and management review – as described below.

We have adopted an Environmental Protection Policy and continue to develop and implement policies and procedures to address specific environmental issues and reduce environmental risk. Each policy is implemented with training for employees and a clear identification of roles and responsibilities.

Our partnership in Responsible CareÒ is a key part of our commitment as we strive to be a leader in railway and public safety. Responsible CareÒ, an initiative of the Canadian Chemical Producers Association, is an ethic for the safe and environmentally sound management of chemicals throughout their life cycle. Partnership in Responsible CareÒ involves a public commitment to continually improve the industry’s environmental, health and safety performance. We successfully completed our first Responsible CareÒ external verification in June 2002 and were granted “Responsible CareÒ practice-in-place” status. We were successfully re-verified in 2005.

We have also been a partner of the American Chemistry Council (“ACC”) since 1999 and are currently working with the ACC and its Transportation Partner Group to develop verification protocols and processes for our U.S. facilities.

We prepare an annual Corporate Environmental Plan, which includes details of our environmental goals and objectives as well as high-level strategies and tactics. The plan is used by various departments to integrate key corporate environmental strategies into their business plans.

We have developed specific environmental programs to address areas such as air emissions, wastewater, management of vegetation, chemicals and waste, storage tanks and fuelling facilities, and environmental impact assessment. Our environmental specialists and consultants lead these programs.

Our focus is on preventing spills and other incidents that have a negative impact on the environment. As a precaution, we have established a Strategic Emergency Response Contractor network and located spill equipment kits across Canada and the U.S. to ensure a rapid and efficient response in the event of an environmental incident. In addition, we regularly update and test emergency preparedness and response plans.

We have taken a proactive position to the remediation of historically impacted sites and have an accounting accrual for environmental costs that extends to 2015.

In the fourth quarter of 2004, we recorded a $90.9-million charge for costs associated with investigation, characterization, remediation and other applicable actions related to environmental contamination at a property in the U.S., which includes areas previously leased to third parties. We are participating in the State of Minnesota’s voluntary investigation and clean-up program

at the east side of the property. The property is the subject of ongoing fieldwork being undertaken in conjunction with the appropriate State of Minnesota authorities to determine the extent and magnitude of the contamination and the appropriate remediation plan. We filed with the State of Minnesota in 2005 a response action plan for the east side of the property. The costs are expected to be incurred over approximately 10 years.

In the third quarter of 2005, we reached a binding settlement in relation to a lawsuit with a potentially responsible party involving portions of past environmental contamination at a property in the U.S. The lawsuit against this other party has been dismissed and the party has accepted responsibility for designated portions of the property and paid us a settlement sum in partial payment of the response costs we have incurred.

As a result of the settlement, we were able to reverse accrued liabilities related to the property and recognize a total reduction of $33.9 million to the special charges accrued in prior years. Under applicable accounting rules, this reduction could not be recognized until the outcome of the lawsuit or any binding settlement with the other responsible party became known.

We continue to be responsible for remediation work on portions of the property not addressed by the binding settlement, and continue to retain liability accruals for remaining future expected costs. This work, along with all work addressed under the binding settlement, will be overseen by the State of Minnesota’s voluntary investigation and clean-up program to ensure that all such remaining work at the property is completed in accordance with applicable standards.

Our environmental audit comprehensively, systematically and regularly assesses our facilities for compliance with legal requirements and conformance to our policies, which are based on legal requirements and accepted industry standards. Audits are scheduled based on risk assessment for each facility and are led by third-party environmental audit specialists supported by our environmental staff.

Audits are followed by a formal Corrective Action Planning (“CAP”) process that ensures findings are addressed in a timely manner. Progress is monitored against completion targets and reported quarterly to senior management. Completion targets have been substantially met every year since the CAP process was created in 1999.

Our Board of Directors has established an Environmental and Safety Committee that conducts a semi-annual comprehensive review of environmental issues. An Environmental Lead Team, which is comprised of senior leaders of our Real Estate, Legal Services, Marketing and Sales, Finance, Operations, Supply Services, and Environmental Services departments, meets quarterly to review environmental matters.

We spent $32.6 million in 2005 for environmental management, including amounts spent for ongoing operations, capital upgrades and remediation.

Our rail operations in Canada are subject to regulation of service, rate setting, network rationalization and safety by the CTA, the Railway Safety Act and certain other statutes. Our U.S. rail operations are subject to regulations administered by the STB and the FRA.

Our economic activities, including matters relating to rates, level of service obligations and line discontinuance, are subject to the provisions of the CTA.

The CTA contains shipper rate and service protections, including final-offer arbitration, competitive line rates, and compulsory interswitching, which allows a shipper to request a railway to move its traffic to the nearest competitive interchange point with another railway within a 30-kilometre radius for a regulated fee. However, to gain recourse to certain of these protections, shippers must establish that they would suffer substantial commercial harm if the relief sought were not granted. These shipper protections also extend to western Canadian grain transportation.

In late March 2005, the federal government introduced a bill with miscellaneous changes to the CTA. Progress of the bill through Parliament ceased when Parliament was dissolved on November 29, 2005. It is not known whether the newly elected federal government will reintroduce the proposed changes.

Canada’s federally regulated railways are also subject to the Railway Safety Act, which governs safety and operational aspects of the industry, and to the Canadian Transportation Accident Investigation and Safety Board Act. They are also subject to legislation relating to the environment and the transportation of hazardous materials.

There have been efforts in recent years to re-regulate certain aspects of the U.S. rail industry previously deregulated under the Staggers Rail Act of 1980. The rail industry opposes re-regulation.

The STB regulates a variety of railway matters, including: service levels; certain freight car rental payments; certain rail traffic rates; the terms under which railways may gain access to each other’s facilities and traffic; mergers and acquisitions of railways; and the abandonment, sale and discontinuance of operations on rail lines.

We believe STB regulations governing mergers and consolidation of Class 1 railways require applicants to demonstrate that a proposed transaction would be in the public interest and would enhance competition, where necessary, to offset any negative effects.

The FRA governs all safety-related aspects of railway operations and, therefore, has jurisdiction over our operations in the U.S. State and local regulatory agencies may also exercise jurisdiction over certain safety and operational matters of local significance.

We maintain insurance policies to protect our assets and to protect against liabilities. Our insurance policies include, but are not limited to, liability insurance, director and officer liability insurance, automobile insurance and property insurance. The property insurance program includes business interruption coverage, which would respond in the event of catastrophic damage to our infrastructure. We believe our insurance is adequate to protect us from known and unknown liabilities.

No rail services were provided to related parties in 2005.

Dividends declared by the Board of Directors in the last three years are as follows:

Our Board of Directors will give consideration on a quarterly basis to the payment of future dividends. The amount of any future quarterly dividends will be determined based on a number of factors that may include the results of operations, financial condition, cash requirements and future prospects of the Company. We are, however, under no obligation to declare dividends and the declaration of dividends is wholly within the Board of Directors’ discretion. Further, our Board of Directors may cease declaring dividends or may declare dividends in amounts that are different from those previously declared. Restrictions in the credit or financing agreements entered into by the Company or the provisions of applicable law may preclude the payment of dividends in certain circumstances.

Our debt securities are rated annually by three approved rating organizations – Moody’s Investors Service, Inc., Standard & Poor’s Corporation and Dominion Bond Rating Service Limited. Currently, our securities are rated as Investment Grade, as shown in the chart below:

Credit ratings are intended to provide investors with an independent measure of the credit quality of an issue of securities and are indicators of the likelihood of payment and of the capacity and willingness of a company to meet its financial commitment on an obligation in accordance with the terms of the obligation. A description of the rating categories of each of the rating agencies in the table above is set out below.

Credit ratings are not recommendations to purchase, hold or sell securities and do not address the market price or suitability of a specific security for a particular investor and may be subject to revision or withdrawal at any time by the rating agencies. Credit ratings may not reflect the potential impact of all risks on the value of securities. In addition, real or anticipated changes in the rating assigned to a security will generally affect the market value of that security. There can be no assurance that a rating will remain in effect for any given period of time or that a rating will not be revised or withdrawn entirely by a rating agency in the future.

The Common Shares of CPR are listed on the Toronto Stock Exchange and the New York Stock Exchange under the symbol “CP”.

The following chart provides the monthly trading information for our Common Shares on the Toronto Stock Exchange during 2005.

The following chart provides the monthly trading information for our Common Shares on the New York Stock Exchange during 2005.

On May 31, 2005, we completed the filings required for a normal course issuer bid to enable the Company to purchase for cancellation up to 2.5 million of the outstanding Common Shares during the 12-month period from June 6, 2005, to June 5, 2006. The number of shares that may be purchased represents approximately 1.6% of the 158,976,508 Common Shares outstanding on May 25, 2005. Purchases may be made through the facilities of the Toronto Stock Exchange and the New York Stock Exchange. The price paid for shares will be the market price at the time of purchase. The purchases, made using surplus funds, are intended to mitigate dilution that may occur as a result of the issuance of Common Shares pursuant to the exercise of stock options under our compensation programs. We also believe that the market price of our Common Shares could be such that the purchase of Common Shares may be an attractive and appropriate use of corporate funds in light of potential benefits to remaining shareholders. From June 6, 2005, to January 31, 2006, 1,761,000 Common Shares were purchased at an average price of $45.77 per share.

Shareholders may obtain, without charge, a copy of our Notice of Intention to Make a Normal Course Issuer Bid by writing The Office of the Corporate Secretary, Canadian Pacific Railway Limited, Suite 920, Gulf Canada Square, 401- 9th Avenue S.W., Calgary, Alberta, T2P 4Z4, or by telephone at (403)319-7165 or 1-866-861-4289, by fax at (403)319-6770, or by e-mail to Shareholder@cpr.ca.

On February 21, 2006, we announced our intention, subject to regulatory approval, to expand the normal course issuer bid program and to renew it at the time of its scheduled expiry date to enable us to purchase up to 5.5 million shares. The remaining share repurchases will occur during 2006.

Following are the names and municipalities of residence of the directors and officers of the Company, their positions and principal occupations within the past five years, the period during which each director has served as director of the Company, and the date on which each director’s term of office expires.

S.E. Bachand was a director of Krystal Bond Inc. when it was subject to a cease trade order on April 12, 2002, for failure to file financial statements. It has since ceased to operate as a going concern. J.E. Cleghorn, a director of Nortel Networks Corporation and Nortel Networks Limited was subject to a cease trade order, prohibiting trading in Nortel Networks securities, issued in May 2004 for failure by Nortel Networks to file certain financial statements. The cease trade order, issued by the Ontario Securities Commission against directors, officers and certain other current and former employees of Nortel Networks, was revoked on June 21, 2005.

The following are executive officers of CPR:

As at December 31, 2005, the directors and senior officers, as a group, beneficially owned, either directly or indirectly, or exercised control or direction over a total of 157,185 Common Shares of CPR, representing 0.10% of the outstanding Common Shares as of that date.

Mr. Robert J. Ritchie, CEO, will retire from CPR on May 5, 2006, and will not be eligible to stand for re-election as a director.

Mr. J.E. Newall, Chairman of the Board, will retire on May 5, 2006, having attained the retirement age of 70 years for directors under our By-Laws.

We are involved in various claims and litigation arising in the normal course of business. Following are the only significant legal proceedings currently in progress.

The Stoney Tribal Council has filed an action against CPR and others in the amount of $150 million for alleged trespass and unlawful removal of oil and gas from reserve lands.

It is too early to make an assessment of the amount in question in this action, an assessment of the merits of the claim, the likelihood that the Plaintiffs will succeed against any or all of the Defendants or the degree to which we may be entitled to indemnity from other parties. We believe adequate provision has been made in our financial statements for this lawsuit.

On January 18, 2002, one of our trains derailed outside of Minot, North Dakota. The site of the derailment was immediately west of the city and adjacent to a residential neighbourhood. Thirty-one cars of the 112 cars on the train derailed. Five cars containing anhydrous ammonia catastrophically ruptured and a vapour plume covered the derailment site and surrounding area.

Immediately following the derailment, we began a process of environmental remediation and monitoring at a cost in excess of US$8 million. In addition, we have settled almost 30,000 claims from residents of the Minot area for damages relating to the derailment.

Several hundred individual lawsuits have been filed against CPR in Hennepin County, Minnesota, associated with the Minot derailment. A judge has been appointed by the Minnesota state court to hear all of these cases. That judge has ruled that we will not be subject to punitive damages. We are working closely with our insurers to resolve as many cases as possible. To date, we have succeeded in settling the case involving wrongful death and three other cases in which the plaintiffs were seriously injured.

In addition to the individual lawsuits in Hennepin County, a class action lawsuit has been filed in federal court in North Dakota.

We believe adequate provision has been made in our financial statements for this lawsuit.

Computershare Investor Services Inc., with transfer facilities in Montreal, Toronto, Calgary and Vancouver, serves as transfer agent and registrar for CPR’s Common Shares in Canada.

Computershare Trust Company of New York serves as co-transfer agent and co-registrar for CPR’s Common Shares in New York.

Requests for information should be directed to:
     Computershare Investor Services Inc.
     100 University Avenue, 9^th Floor
     Toronto, Ontario, Canada
     M5J 2Y1

The following individuals comprise the entire membership of the Audit, Finance and Risk Management Committee (“the Committee”).

Stephen E. Bachand - Mr. Bachand is the Retired President and Chief Executive Officer of Canadian Tire Corporation, Limited, a hard goods retailer specializing in automotive, sports and leisure, and home products. He held that position from March 1993 until his retirement in August 2000. He is a director of the Bank of Montreal and Fairmont Hotels & Resorts Inc. He graduated from Williams College in Williamstown, Massachusetts, with a B.A., and from the Darden School of the University of Virginia with an M.B.A.

John E. Cleghorn - Mr. Cleghorn is the Chairman and a director of SNC-Lavalin Group Inc., an international engineering and construction firm. He is the retired Chairman and Chief Executive Officer of the Royal Bank of Canada. He held that position from January 1995 until his retirement in July 2001. He is a director of Molson Coors Brewing Company, Nortel Networks Corporation and Nortel Networks Limited. He is a member of the Desautels Faculty of Management International Advisory Board and Governor Emeritus of McGill University, Immediate Past Chairman and a director of Historica Foundation of Canada, Chancellor Emeritus of Wilfrid Laurier University and a director of the Atlantic Salmon Federation. He graduated from McGill University in Montreal with a B.Com. and is a chartered accountant.

Madeleine Paquin - Ms. Paquin is the President and Chief Executive Officer and a director of Logistec Corporation, an international cargo-handling company. She has held that position since January 1996. She is also a director of Aéroports de Montréal. She graduated from École des Hautes Études Commerciales, Université de Montréal with a G.D.A.S. and from the Richard Ivey School of Business, University of Western Ontario with an H.B.A.

Roger Phillips (Chair) - Mr. Phillips is the Retired President and Chief Executive Officer of IPSCO Inc., a steel manufacturing company. He held that position from February 1982 until his retirement in December 2001. He is a director of Inco Limited, Toronto Dominion Bank, Imperial Oil Limited and Cleveland-Cliffs Inc. Mr. Phillips is a Fellow of the Institute of Physics and a Member of the Canadian Association of Physicists. He is also President of La Sauciere Investments Inc., a private company. He was appointed an Officer of the Order of Canada in 1999 and was presented with the Saskatchewan Order of Merit in 2002. He graduated from McGill University in Montreal with a B.Sc. in Physics and Mathematics.

Michael W. Wright - Mr. Wright is the Retired Chairman of the Board and Chief Executive Officer of SUPERVALU INC., a food distributor and grocery retailer. He was Chairman and Chief Executive Officer from June 1981 to June 2001 and Chairman until June 2002. He is a Past Chairman of Food Distributors International and the Food Marketing Institute, and is a director of Wells Fargo & Company, Honeywell International, Inc., S.C. Johnson & Son, Inc., and Cargill Inc. He is a Trustee Emeritus of the University of Minnesota Foundation, and is a member of the University of Minnesota Law School Board of Visitors and the Board of Trustees of St. Thomas Academy. He graduated from the University of Minnesota with a B.A. and from the University of Minnesota Law School with a J.D. (Honours).

Each of the aforementioned committee members has been determined by the board to be independent and financially literate within the meaning of Multilateral Instrument 52-110.

The Committee has adopted a written policy governing the pre-approval of audit and non-audit services to be provided to CPR by our independent auditors. The policy is reviewed annually and the audit and non-audit services to be provided by our independent auditors, as well as the budgeted amounts for such services, are pre-approved at that time. Our Vice-President and Comptroller must submit to the Committee at least quarterly a report of all services performed or to be performed by our independent auditors pursuant to the policy. Any additional audit or non-audit services to be provided by our independent auditors either not included among the pre-approved services or exceeding the budgeted amount for such pre-approved services by more than 10% must be individually pre-approved by the Committee or its Chairman, who must report all such additional pre-approvals to the Committee at its next meeting following the granting thereof. Our independent auditors’ annual audit services engagement terms and fees are subject to the specific pre-approval of the Committee. Non-audit services that our independent auditors are prohibited from providing to us may not be pre-approved. In addition, prior to the granting of any pre-approval, the Committee or its Chairman, as the case may be, must be satisfied that the performance of the services in question will not compromise the independence of our independent auditors. Our Director, Internal Audit monitors compliance with this policy.

The term “the Company” herein shall refer to each of CPRL and CPRC, and the terms “Board,” “Directors”, “Board of Directors” and “Committee” shall refer to the Board, Directors, Board of Directors, or Committee of CPRL or CPRC, as applicable.

Fees payable to PricewaterhouseCoopers LLP for the years ended December 31, 2005, and December 31, 2004, totalled $2,142,140 and $1,898,000, respectively, as detailed in the following table:

The nature of the services provided by PricewaterhouseCoopers LLP under each of the categories indicated in the table is described below.

Audit fees were for professional services rendered for the audit of our annual financial statements and for services provided in connection with statutory and regulatory filings or engagements.

Audit-related fees were for assurance and associated services reasonably related to the performance of the audit or review of the annual statements and not reported under “Audit Fees” above. These services consisted of: special attest services as required by various government entities; accounting consultations; audit of financial statements of certain subsidiaries and of our various pension and benefits plans; assistance with prospectus filings; access fees for technical accounting database resources; and assistance with preparations for compliance with Section 404 of the U.S. Sarbanes Oxley Act of 2002.

Tax fees were for services consisting of: tax compliance, including the review of tax returns; assistance with questions regarding tax audits, the preparation of employee tax returns under our expatriate tax services program and assistance in completing routine tax schedules and calculations; tax planning and advisory services relating to common forms of domestic and international taxation (i.e. income tax, capital tax, goods and services tax, and valued added tax); assistance with the reorganization of group financing; obtaining tax rulings from tax authorities; tax preparation services; and access fees for taxation database resources.

Fees disclosed under this category were for products and services other than those described under “Audit Fees”, “Audit-Related Fees” and “Tax Fees”, above. There were no services in this category in 2005 and 2004.

Additional information about CPR is available on our website at www.cpr.ca and on SEDAR (System for Electronic Document Analysis and Retrieval) at www.sedar.com in Canada, and on the U.S. Securities and Exchange Commission’s website (EDGAR) at www.sec.gov/edgar. The aforementioned documents are issued and made available in accordance with legal requirements and are not incorporated by reference into this AIF.

Additional information, including directors’ and officers’ remuneration and indebtedness, principal holders of our securities and securities authorized for issuance under equity compensation plans, where applicable, is contained in the information circular for our most recent annual meeting of shareholders at which directors were elected.

Additional financial information is provided in our Consolidated Financial Statements and Management’s Discussion and Analysis for the most recently completed financial year.

CHAIRMAN’S 2005 LETTER TO SHAREHOLDERS

This has been an exciting year for Canadian Pacific Railway. The shareholder value we have created since CPR’s spin-off from Canadian Pacific Limited in 2001 is substantial. Our company is growing and thriving.

CPR is in better shape financially than it has ever been in its recent history. Our balance sheet is strong and we now have financial flexibility. The railway is generating significantly greater free cash flow. We have retired debt and our debt ratios are now solid. Return on capital employed continues to grow and now covers the cost of capital. We have made impressive progress with our service levels, our operating ratio and our leading safety programs.

Operationally, CPR has made huge strides in building a scheduled railway. CPR’s approach to this has been ground breaking. We have leveraged technology, modernized our locomotive and car fleets, struck new and imaginative marketing and operating partnerships with other participants in the transportation supply chain, and increased capacity. By so doing, we have greatly improved the overall operating fluidity and productivity of the railway.

Early last year, your Board did not hesitate to approve the expenditure of capital to expand our network corridor in western Canada. This investment has strengthened, modernized and more closely aligned our capacity with demand for our services. The rationale was compelling and the benefits are clear.

International trade is the fastest growing part of the world economy and I believe that no railway is better situated than CPR to benefit from this growth. Our railway provides Pacific Rim importers and exporters with highly competitive routes between Vancouver and Chicago and many other points east. CPR’s Montreal-Chicago rail corridor is one of the shortest land routes for European cargo destined for North America’s industrial heartland. Our franchise is well positioned today to benefit from further growth in global trade and world demand for Canadian commodities.

I want to commend CPR’s management and employees for the railway’s outstanding operating performance. The CPR team is strong and we have the right systems and programs in place to continue to recruit and retain the best people. One thing that has always impressed me about CPR is the depth of talent of our team. They are moving more goods more safely than ever in the history of the railway. At every level of the company, we have top-quality, highly capable railroaders who are passionate about CPR and its contribution to the competitiveness and growth of the North American economy.

I also want to thank the members of our Board of Directors for the critical role each is playing in the development of the company and the skill they have demonstrated in representing shareholders’ interests. CPR’s Board is both balanced and effective and has given management excellent guidance. Board members have put in place highly effective governance procedures and solid financial controls that will stand CPR and its shareholders in good stead for many years to come.

I will retire from Canadian Pacific Railway’s Board in May after more than four years as Chairman. It has been both a privilege and honour for me to have had this opportunity to serve as Chairman of one Canada’s greatest enterprises.

2005 Annual Report | 01

CHIEF EXECUTIVE OFFICER’S 2005 LETTER TO SHAREHOLDERS

By every measure, 2005 was the busiest and most successful year in Canadian Pacific Railway’s 125-year history.

We promised our shareholders we would grow our business by double digits. We delivered.

We promised we would generate higher yield. We delivered.

We promised we would recover fuel cost increases. We delivered.

We promised we would grow share earnings. We delivered.

We also said we would expand track capacity and we delivered on that promise, too – completing our largest capacity expansion in Canada in over two decades while at the same time carrying record levels of traffic spurred by a strong North American economy and booming Pacific trade.

As a result, CPR is in excellent shape to take advantage of the many opportunities we see before us. We have the right assets – locomotives, cars and track network – and the right team of people in place.

We completed the expansion of our track corridor in western Canada between the prairies and Vancouver – our busiest stretch of track – safely, on time and within budget. We laid new sections of double track, significantly increased the number of track-to-track crossovers, built and extended sidings and improved signal systems. Every CPR employee involved in this effort can be very proud of this major accomplishment. This expansion has allowed us to improve fluidity and increase rail capacity by 12 % on this strategic corridor.

The decision to invest in the capacity expansion program was made within an environment of general regulatory stability, supported by federal government policy statements and public consultations with a broad range of transportation stakeholders. The decision to expand our network was a timely one, positioning us to handle growing volumes of consumer goods arriving in containers from China and other Asia-Pacific countries, and to supply resources to offshore markets. We continually seek to grow the value and scale of our core business.

Generating quality revenue growth is the guiding principle of our marketing and capacity expansion strategy and our success in 2005 made for a historic year for our railway. Revenue grew robustly in all three of our business lines – bulk, intermodal, and merchandise – increasing 13 % to $4,392 million. This achievement is particularly noteworthy given that a strengthening Canadian dollar trimmed approximately $120 million out of revenue generated in U.S. dollars.

Operating income, before special charges, broke through the billion-dollar mark for the first time, increasing 27 % to $1,001 million, compared to $789 million in 2004. Operating ratio improved 2.6 percentage points to 77.2 %.

Net income rose 30 % to $543 million or $3.39 per diluted share in 2005, including foreign exchange gains on long-term debt and other specified items.

The year was not without its significant challenges. In addition to the impact of the strong Canadian dollar on our revenues, fuel price increases, driven largely by record high crude oil prices and increased refining margins, pushed up operating expenses. CPR was able to recover most of the increases through fuel surcharges and hedging.

We expect the robust business environment the railway experienced in 2005 will continue in 2006.

At a macro level, the North American economy appears to be strong and there is continuing strength in the Asia-Pacific trade that has been driving so much of our activity through the Vancouver Gateway.

The fundamentals of CPR’s key business lines are also positive. Resource demand, although tempered from the hyperactivity of the first half of 2005, remains vigorous and Canadian coal, sulphur and potash are very well positioned to serve global demand. Grain volumes should remain strong, although the market for producers is challenging. Our service profile in both intermodal and merchandise is excellent. Intermodal has been a major growth engine for CPR for many years and we see that continuing as dynamic global trading patterns drive the import-export sector. Our merchandise sector

02 | 2005 Annual Report

is positioned to grow as a result of improvements we have made to our service levels and our increasing competitiveness with long-haul trucks.

We see continuing room to increase revenues through targeted volume growth and a yield program that is producing higher freight rates and a stronger customer portfolio. The improvements we are making in service quality are also giving us pricing strength in our markets.

CPR will improve freight volumes and yield and drive down costs through our portfolio of initiatives – continuing to develop strategic marketing and operating partnerships; executing a scheduled railway through our innovative Integrated Operating Plan; and being the most fluid railway in North America. Improved fluidity drives more value from existing assets and resources.

Even with our excellent results in 2005 and the strong prospects we see for 2006, we never lose sight of the fact that there are always risks. We continually monitor our network for any signals that may require adaptation on our part. The cyclicality of commodities markets has always been with us and we know that no economic cycle lasts forever. Throughout its history, CPR has proven time and time again that it can manage through adversity. The work we have been doing to strengthen the franchise is designed to ensure that the company will be successful in any economic environment.

None of our strategies will succeed if we do not have the right people to lead at all levels. Our quality revenue growth and productivity goals are built through their efforts. CPR employees at all levels of the organization demonstrated in 2005 how highly engaged they are in our efforts to build a successful railway. We have a strong and reinvigorated management team in place, proving every day its commitment to safety, service, productivity and growth.

Our commitment to safety never wavers and we demonstrated this again in 2005 – by operating the railway safely during our expansion work; through CPR’s leadership in safe train operations; and by achieving our lowest rate ever for personal injuries. However, the whole CPR team was deeply saddened by the loss of two of our fellow employees – Dennis Sokoliuk and Robert Martin – in work-related incidents. This reminds us that we can never take CPR’s strong safety record for granted and must constantly reinforce our safety culture throughout the organization.

As I have announced my retirement at the close of the Annual General Meeting, this will be my last letter to shareholders. I want to thank you for the opportunity to serve as CPR’s President and CEO since 1995. It was an exciting time to lead this great company and its dedicated and talented employee team. I can think of no better job in the country.

As part of our transition, we made significant changes to our management team at the end of 2005. It is the intention of the Board to appoint Fred Green as President and CEO following the Annual General Meeting. Fred is an excellent leader and I have every confidence that he and the management team will lead this enterprise to great accomplishments.

I also wish to thank our Board of Directors for their support during a historic year for the railway. In particular, I wish to extend a special personal note of thanks and gratitude to Ted Newall, who will be retiring as Chairman this year. Ted has made an invaluable contribution in building CPR into the success story that it is today. Since 2001, when CPR once again became a stand-alone company, shareholders have seen the CPR share price more than double to $48.71 at the end of 2005 from $22.50 on the day we began public trading.

With confidence in the strength of our franchise, a plan for implementing our strategic initiatives, and a continuing robust economic environment, CPR stands ready to take on the challenges and capture the many opportunities that we see ahead in 2006.

2005 Annual Report | 03

MANAGEMENT’S DISCUSSION AND ANALYSIS

February 20, 2006

This Management’s Discussion and Analysis (“MD&A”) supplements the Consolidated Financial Statements and related notes for the year ended December 31, 2005. Except where otherwise indicated, all financial information reflected herein is expressed in Canadian dollars. All information has been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”). In this MD&A, “our”, “us”, “we”, “CPR” and “the Company” refer to Canadian Pacific Railway Limited and its subsidiaries. Other terms not defined in the body of this MD&A are defined in the Glossary of Terms.

BUSINESS PROFILE AND STRATEGY

Canadian Pacific Railway Limited and its subsidiaries operate a transcontinental railway in Canada and the United States and provide logistics and supply chain expertise. We provide rail and intermodal transportation services over a network of approximately 13,600 miles, serving the principal business centres of Canada, from Montreal, Quebec, to Vancouver, British Columbia, and the U.S. Northeast and Midwest regions. Our railway feeds directly into the U.S. heartland from the East and West coasts. Agreements with other carriers extend our market reach east of Montreal in Canada, throughout the U.S. and into Mexico. We transport bulk commodities, merchandise freight and intermodal traffic. Bulk commodities include grain, coal, sulphur and fertilizers. Merchandise freight consists of finished vehicles and automotive parts, as well as forest and industrial and consumer products. Intermodal traffic consists largely of high-value, time-sensitive retail goods transported in overseas containers that can be handled by train, ship and truck, and in domestic containers and trailers that can be moved by train and truck.

Our objective is to create long-term value for customers, shareholders and employees primarily by profitably growing within the footprint of our core rail franchise. We seek to accomplish this objective through the following three-part strategy:

Additional information, including our Consolidated Financial Statements, MD&A, Annual Information Form, press releases and other required filing documents, is available on SEDAR at www.sedar.com in Canada, on EDGAR at www.sec.gov in the U.S. and on our website at www.cpr.ca. The aforementioned documents are issued and made available in accordance with legal requirements and are not incorporated by reference into this MD&A.

04 | 2005 Annual Report

HIGHLIGHTS SUMMARY

For the year ended December 31 (in millions, except per-share data)

2005 Annual Report | 05

OPERATING RESULTS

Net income for the year ended December 31, 2005, was $542.9 million, up $129.9 million from 2004. Net income was $413.0 million in 2004, an increase of $11.7 million from $401.3 million in 2003. Operating income in 2005 was $991.1 million, up $274.5 million from 2004. Operating income was $716.6 million in 2004, an increase of $231.0 million from $485.6 million in 2003. The increase in 2005, compared with 2004, was due to:

The increase in 2005 was partially offset by:

Fuel prices were significantly higher in 2005 than in 2004. We responded by expanding the percentage of our business covered by fuel surcharges and by continuing our hedge program. These initiatives enabled CPR to recover almost all of the fuel price increase in 2005.

Increased income tax expenses (discussed further in this MD&A in the section “Other Income Statement Items”) and a decrease of $49.7 million in before-tax ($72.1 million after tax) foreign exchange gains on long-term debt (“FX on LTD”) also had a negative impact on net income in 2005.

Net and operating income in 2004 increased from 2003 mainly due to:

The increase in 2004 was partially offset by:

The special charges taken in 2004 and 2003 are discussed further in this MD&A under the sub-heading “Other Specified Items”.

Net income was also negatively affected in 2004 by a decrease of $115.1 million in before-tax ($130 million after tax) FX on LTD gains.

06 | 2005 Annual Report

Diluted earnings per share (“EPS”) in 2005 was $3.39, an increase of $0.79 from 2004. Diluted EPS of $2.60 in 2004 was an increase of $0.08 from $2.52 in 2003. Diluted EPS is calculated by dividing net income by the weighted average number of shares outstanding, adjusted for the dilutive effect of outstanding stock options, as calculated using the Treasury Stock Method. This method assumes options that have an exercise price below the market price of the shares are exercised and the proceeds are used to purchase common shares at the average market price during the period. There was a positive impact on diluted EPS in 2005 resulting from a reduction in the number of shares outstanding as shares were cancelled through our share repurchase plan (discussed further in this MD&A under the sub-heading “Share Capital”, in the section “Balance Sheet”).

Our operating ratio improved to 77.2 % in 2005, compared with 79.8 % in 2004 and 80.1 % in 2003. The operating ratio, which excludes other specified items (discussed further in this MD&A under the sub-heading “Other Specified Items”), provides the percentage of revenues used to operate the railway. A lower percentage indicates higher efficiency.

Fluctuations in Foreign Exchange affect our results because U.S. dollar-denominated revenues and expenses are translated into Canadian dollars. U.S. dollar-denominated revenues and expenses are reduced when the Canadian dollar strengthens in relation to the U.S. dollar. Operating income is also reduced because more revenues than expenses are generated in U.S. dollars. Fluctuations were significant year over year, as the Canadian dollar strengthened against the U.S. dollar by approximately 7 % in 2005, compared with 2004, and by approximately 8 % in 2004, compared with 2003. The average foreign exchange rate for converting U.S. dollars to Canadian dollars decreased to $1.21 in 2005 from $1.30 in 2004 and $1.41 in 2003. The table on page 8 shows the approximate effect of the change in Foreign Exchange on our revenues and expenses in 2005 and 2004. This analysis does not include the effects of the change in Foreign Exchange on balance sheet accounts or of foreign exchange hedging activity.

On average, a $0.01 increase in the Canadian dollar reduces annual operating income by approximately $3 million. As a result, Foreign Exchange fluctuations had a substantial impact on our operating income in 2005 and 2004, as illustrated in the table on page 8. From time to time, we use foreign exchange forward contracts to partially hedge the effects of Foreign Exchange transaction gains and losses and other economic effects on our business. In addition, we have designated a portion of our U.S. dollar-denominated long-term debt as a hedge of our net investment in self-sustaining foreign subsidiaries. Our hedging instruments are discussed further in this MD&A in the section “Financial Instruments”.

2005 Annual Report | 07

NON-GAAP EARNINGS

We present non-GAAP earnings and cash flow information in this MD&A to provide a basis for evaluating underlying earnings and liquidity trends in our business that can be compared with results of our operations in prior periods. These non-GAAP earnings exclude foreign currency translation effects on long-term debt, which can be volatile and short term, and other specified items that are not among our normal ongoing revenues and operating expenses. The table on page 9 details a reconciliation of income, before FX on LTD and other specified items, to net income, as presented in the financial statements. Free cash excludes cash provided by (used in) financing activities but is after payment of dividends. Free cash is discussed further and reconciled to the increase in cash as presented in the financial statements in the “Liquidity and Capital Resources” section of this MD&A.

Earnings that exclude FX on LTD and other specified items, and free cash as described in this MD&A, have no standardized meanings and are not defined by Canadian GAAP and, therefore, are unlikely to be comparable to similar measures presented by other companies.

08 | 2005 Annual Report

(reconciliation of non-GAAP earnings to GAAP earnings)