U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 40-F

o

REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x

ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

CANADIAN PACIFIC RAILWAY LIMITED

CANADIAN PACIFIC RAILWAY COMPANY

CANADA		4011		98-0355078 (Canadian Pacific Railway Limited) 98-0001377 (Canadian Pacific Railway Company)
(Province or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification Number)

Suite 500, Gulf Canada Square, 401-9th Avenue S.W., Calgary, Alberta, Canada T2P 4Z4
(403) 319-7000

CT Corporation System, 111 Eighth Avenue, New York, New York 10011, (212) 894-8940

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

Title of Each Class		Name of Each Exchange on Which Registered
Common Shares, without par value, of Canadian Pacific Railway Limited		New York Stock Exchange
Common Share Purchase Rights of Canadian Pacific Railway Limited		New York Stock Exchange
Perpetual 4% Consolidated Debenture Stock of Canadian Pacific Railway Company		New York Stock Exchange

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

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: Debt Securities

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

x     Annual information form		x     Audited annual financial statements

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

At December 31, 2009, 168,470,143 Common Shares of Canadian Pacific Railway Limited (“CPRL”) were issued and outstanding. At December 31, 2009, 347,170,009 Ordinary Shares of Canadian Pacific Railway Company (“CPRC”) were issued and outstanding. All of the ordinary shares of CPRC are held by CPRL.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES     x		NO     o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (s.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).

YES     x		NO     o

PRIOR FILINGS MODIFIED AND SUPERSEDED

     The Registrants’ Annual Report on Form 40-F for the year ended December 31, 2009, at the time of filing with the Securities and Exchange Commission (the “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); Form S-8 No. 333-127943 (Canadian Pacific Railway Limited); and Form S-8 No. 333‑140955 (Canadian Pacific Railway Limited); and Form F-10 No. 333-159945 (Canadian Pacific Railway Limited).

     In addition, this Annual Report on Form 40-F is incorporated by reference into or as an exhibit to, as applicable, the Registration Statement on Form F-9 No. 333-159943 (Canadian Pacific Railway Company).

ANNUAL INFORMATION FORM, CONSOLIDATED AUDITED ANNUAL FINANCIAL STATEMENTS
AND MANAGEMENT’S DISCUSSION AND ANALYSIS

A.     Annual Information Form

     For the Annual Information Form of the Registrant for the year ended December 31, 2009 see pages 1 through 41 of the Registrant’s 2009 Annual Information Form incorporated by reference and included herein.

B.     Audited Annual Financial Statements

     For consolidated audited financial statements, including the report of the auditors with respect thereto, see pages 51 through 106 of the Registrant’s 2009 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 31 — Reconciliation of Canadian and United States generally accepted accounting principles on pages 101 through 106 of such 2009 Annual Report.

C.     Management’s Discussion and Analysis

     For management’s discussion and analysis, see pages 4 through 49 of the Registrant’s 2009 Annual Report incorporated by reference and included herein.

     For the purposes of this Annual Report on Form 40-F, only pages 4 through 106 of the Registrant’s 2009 Annual Report referred to above shall be deemed filed, and the balance of such 2009 Annual Report, except as it may be otherwise specifically incorporated by reference in the Registrant’s Annual Information Form, shall be deemed not filed with the Securities and Exchange Commission as part of this Annual Report on Form 40-F under the Exchange Act.

DISCLOSURE CONTROLS AND PROCEDURES

     As of December 31, 2009, 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) and 15d-15(e) under the Exchange Act). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of December 31, 2009, to ensure that information required to be disclosed by the Registrants in reports that they file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Commission rules and forms and (ii) accumulated and communicated to the Registrants’ management, including their Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

     For management’s report on internal control over financial reporting, see page 51 of the Registrant’s 2009 Annual Report, incorporated by reference and included herein.

     The effectiveness of the Registrants’ internal control over financial reporting as of December 31, 2009 has been audited by PricewaterhouseCoopers LLP, independent auditors, as stated in their report on page 52 of the Registrant’s 2009 Annual Report.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

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

CODE OF ETHICS

A.     The Registrants’ Code of Business Ethics 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. All Directors have signed acknowledgements that they have read, understood and agree to comply with the Code. The Registrant conducts mandatory on-line ethics training for officers and non-union employees. As part of the on-line ethics training, officers and non-union employees are required to acknowledge that they have read, understood and agree to comply with the Code. 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.

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

CORPORATE GOVERNANCE PRINCIPLES AND GUIDELINES

     The Registrants last amended their Corporate Governance Principles and Guidelines in December 2008 to include discretionary term limits of between five and seven years of service as Board or Board Committee Chair and to change the mandatory retirement age for directors from seventy (70) to seventy-two (72). These principles and guidelines pertain to such matters as, but are not limited to: director qualification standards and responsibilities; election of directors; access by directors to management and independent advisors; director compensation; director orientation and continuing education; management succession; and annual performance evaluations of the board, including its committees and individual directors, and of the Chief Executive Officer. The Corporate Governance Principles and Guidelines are available on the Registrants’ web site at www.cpr.ca and in print to any shareholder who requests them.

COMMITTEE TERMS OF REFERENCE

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

DIRECTOR INDEPENDENCE

     The boards of the Registrants have adopted standards for director independence: (a) prescribed by Section 10A(m)(3) of the Exchange Act and Rule 10A-3(b)(1) promulgated thereunder and National Instrument 52-110 for members of public company audit committees; and (b) set forth in the NYSE Listed Company Manual (the “NYSE Standards”), the Canadian corporate governance standards set forth in National Instrument 58-101 and National 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 F.J. Green, have no material relationship with the Registrants and are independent. Mr. Green is not independent by virtue of the fact that he is the Chief Executive Officer of the Registrants.

EXECUTIVE SESSIONS OF NON-MANAGEMENT DIRECTORS

     The independent directors met in executive sessions without management present at the beginning and end of each meeting of the board of directors as well as at the beginning and end of each committee meeting.

     Interested parties may communicate directly with Mr. J.E. Cleghorn, the chair of the boards of the Registrants, who presided at such executive sessions, by writing to him at the following address, and all communications received at this address will be forwarded to him:

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

AUDIT COMMITTEE FINANCIAL EXPERT

     The following individuals comprise the current 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:

Krystyna T. Hoeg Richard C. Kelly John P. Manley Roger Phillips David W. Raisbeck Michael W. Wright

     Each of the aforementioned directors 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” including the NYSE Standards.

FINANCIAL LITERACY OF AUDIT COMMITTEE MEMBERS

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

SERVICE ON OTHER PUBLIC COMPANY AUDIT COMMITTEES

     Each Registrant’s board has determined that no director who serves on more than two public company audit committees in addition to 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. For purposes of calculating the aggregate number of public company audit committees on which a director serves, each Registrant is counted as a separate public company.

     Effective May 2010, no member of the Audit Committees of the Registrants will serve on more than two public company audit committees in addition to the Audit Committee of either Registrant. During 2009, Krystyna T. Hoeg served on two public company audit committees, in addition to the Audit Committees of the two Registrants. The boards of the Registrants have determined that the service of Ms. Hoeg on the audit committees of two public companies in addition to the two Registrants did not impair her ability to effectively serve on the Audit Committees of the Registrants, for the following reasons:

•

Two of the public company audit committees on which Ms. Hoeg served are the Audit Committees of the Registrants. As Canadian Pacific Railway Company is a wholly-owned subsidiary of Canadian Pacific Railway Limited, and the latter company carries on no business operations and has no assets or liabilities of more than nominal value beyond its 100% shareholding in Canadian Pacific Railway Company, the workload of the Audit Committees is essentially equivalent to the workload of one public company audit committee; and

•

Ms. Hoeg, is the former chief executive officer of a large public company and the former chief financial officer of a large public company and has been designated as an audit committee financial expert for the Registrants. As a result, she no longer has any day-to-day executive or managerial responsibilities and, in

addition, brings to her role on the Audit Committees of the Registrants considerable business experience and a highly-focused and effective approach to audit-related matters.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

     Fees payable to the Registrants’ independent auditors, PricewaterhouseCoopers LLP for the years ended December 31, 2009, and December 31, 2008, totaled $3,396,200 and $3,195,200, respectively, as detailed in the following table:

		Year ended December 31, 2009				Year ended December 31, 2008
Audit Fees		$	2,176,800			$	2,044,700
Audit-Related Fees		$	794,800			$	808,600
Tax Fees		$	424,600			$	341,900
All Other Fees		$	0			$	0
TOTAL		$	3,396,200			$	3,195,200

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

Audit Fees

Audit fees were for professional services rendered for the audit of the Registrants’ annual financial statements and services provided in connection with statutory and regulatory filings or engagements, including the attestation engagement for the independent auditor’s report on the effectiveness of internal controls over financial reporting.

Audit-Related Fees

Audit-related fees were for attestation and related services reasonably related to the performance of the audit or review of the annual financial statements, but which are not reported under “Audit Fees” above. These services consisted of: the audit or review of financial statements of certain subsidiaries and of various pension and benefits plans of the Registrants; special attestation services as may be required by various government entities; access fees for technical accounting database resources; and general advice and assistance related to accounting and/or disclosure matters with respect to new and proposed Canadian, US and International accounting standards, securities regulations, and/or laws.

Tax Fees

Tax fees were for professional services related to tax compliance, tax planning and tax advice. These services consisted of: tax compliance including the review of tax returns; assistance with questions regarding corporate tax audits; tax planning and advisory services relating to common forms of domestic and international taxation (i.e. income tax, capital tax, goods and services tax, and valued added tax); and access fees for taxation database resources.

All Other Fees

Fees disclosed under this category would be for products and services other than those described under “Audit Fees”, “Audit-Related Fees” and “Tax Fees” above. In both 2009 and 2008, there were no services in this category.

PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES PROVIDED BY
INDEPENDENT AUDITORS

     The Audit Committee of each Registrant has 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 annually and the audit and non-audit services to be provided by their independent auditors, as well as the budgeted amounts for such services, are pre-approved at that time. The Vice-President and Comptroller of the Registrants must submit to the Audit Committee at least quarterly a report of all services performed or to be performed by the independent auditors pursuant to the policy. 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 Committee or its Chairman, who must report all such additional pre-approvals to the Audit Committee at its 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 Committee. In addition, prior to the granting of any pre-approval, the Audit 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 the independent auditors. The Chief Internal Auditor for the Registrants monitors compliance with this policy.

OFF-BALANCE SHEET ARRANGEMENTS

     A description of the Registrants’ off-balance sheet arrangements is set forth on page 36 of the Registrants’ 2009 Annual Report incorporated by reference and included herein.

TABLE OF CONTRACTUAL COMMITMENTS

     The table setting forth the Registrants’ contractual commitments is set forth on page 37 of the Registrants’ 2009 Annual Report incorporated by reference and included herein.

UNDERTAKING AND CONSENT TO SERVICE OF PROCESS

A.     Undertaking

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

B.     Consent to Service of Process

     Each Registrant has previously filed a Form F-X in connection with the class of securities to which the obligation to file this report arises. Any change to the name or address of the agent for service of process of either Registrant shall be communicated promptly to the Commission by an amendment to the Form F-X referencing the file number of such Registrant.

SIGNATURES

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

EXHIBITS
99.1		Consent of PricewaterhouseCoopers, Independent Auditors.
99.2		Certification by the Chief Executive Officer of the Registrants filed pursuant to Rule 13a-14(a) of the Exchange Act.
99.3		Certification by Chief Financial Officer of the Registrants filed pursuant to Rule 13a-14(a) of the Exchange Act.
99.4		Certification by the Chief Executive Officer of the Registrants furnished pursuant to 18 U.S.C. Section 1350.
99.5		Certification by the Chief Financial Officer of the Registrants filed pursuant to 18 U.S.C. Section 1350.

Annual Information Form 2009

Table of Contents

SECTION 1: CORPORATE STRUCTURE
1.1 NAME, ADDRESS AND INCORPORATION INFORMATION			2
SECTION 2: INTERCORPORATE RELATIONSHIPS
2.1 PRINCIPAL SUBSIDIARIES			3
SECTION 3: GENERAL DEVELOPMENTS OF THE BUSINESS
3.1 RECENT DEVELOPMENTS			4
SECTION 4: DESCRIPTION OF THE BUSINESS
4.1 OUR BACKGROUND AND NETWORK			5
4.2 STRATEGY			5
4.3 PARTNERSHIPS, ALLIANCES AND NETWORK EFFICIENCY			5
4.4 NETWORK AND RIGHT-OF-WAY			6
4.5 QUARTERLY TRENDS			9
4.6 BUSINESS CATEGORIES			9
4.7 REVENUES			9
4.8 RAILWAY PERFORMANCE			12
4.9 FRANCHISE INVESTMENT			14
4.10 INTEGRATED OPERATING PLAN (“IOP”)			14
4.11 INFORMATION TECHNOLOGY			15
4.12 LABOUR PRODUCTIVITY AND EFFICIENCY			16
4.13 BUSINESS RISKS AND ENTERPRISE RISK MANAGEMENT			16
4.14 INDEMNIFICATIONS			16
4.15 SAFETY			17
4.16 ENVIRONMENTAL PROTECTION			17
4.17 INSURANCE			18
SECTION 5: DIVIDENDS
5.1 DECLARED DIVIDENDS AND DIVIDEND POLICY			19
SECTION 6: CAPITAL STRUCTURE
6.1 DESCRIPTION OF CAPITAL STRUCTURE			20
6.2 SECURITY RATINGS			21
SECTION 7: MARKET FOR SECURITIES
7.1 STOCK EXCHANGE LISTINGS			23
7.2 TRADING PRICE AND VOLUME			23
SECTION 8: DIRECTORS AND OFFICERS
8.1 DIRECTORS			24
8.2 CEASE TRADE ORDERS, BANKRUPTCIES, PENALTIES OR SANCTIONS			25
8.3 SENIOR OFFICERS			26
8.4 SHAREHOLDINGS OF DIRECTORS AND OFFICERS			28
SECTION 9: LEGAL PROCEEDINGS			29
SECTION 10: TRANSFER AGENT
10.1 TRANSFER AGENT			30
SECTION 11: INTERESTS OF EXPERTS			31
SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE
12.1 COMPOSITION OF THE AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE AND RELEVANT EDUCATION AND EXPERIENCE			32
12.2 PRE-APPROVAL OF POLICIES AND PROCEDURES			33
12.3 AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE CHARTER			33
12.4 AUDIT AND NON-AUDIT FEES AND SERVICES			38
SECTION 13: FORWARD LOOKING INFORMATION			40
SECTION 14: ADDITIONAL INFORMATION
14.1 ADDITIONAL COMPANY INFORMATION			41

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

March 15, 2010

SECTION 1: CORPORATE STRUCTURE

In this AIF, “our”, “us”, “we”, “CP” and “the Company” refer to Canadian Pacific Railway Limited (“CPRL”), CPRL and its subsidiaries, CPRL and one or more of its subsidiaries, or one or more of CPRL’s subsidiaries, as the context may require.

1.1 Name, Address and Incorporation Information

Canadian Pacific Railway Limited was incorporated on June 22, 2001, as 3913732 Canada Inc. pursuant to the Canada Business Corporations Act (“the CBCA”). On July 20, 2001, CP 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”) pursuant to section 192 of the CBCA 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 transfer of Canadian Pacific Railway Company (“CPRC”), previously a wholly owned subsidiary of CPL, to CPRL was accomplished as part of a series of steps, pursuant to the terms of the Arrangement.

Our registered, executive and head office is located at Suite 500, 401 — 9th Avenue S.W., Calgary, Alberta T2P 4Z4.

SECTION 2: INTERCORPORATE RELATIONSHIPS

2.1 Principal Subsidiaries

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:

						Percentage of
						Non-Voting
						Securities
				Percentage of Voting		Beneficially Owned,
				Securities Held		or over which
		Incorporated under		Directly or		Control or Direction
Principal Subsidiary(1)		the Laws of		Indirectly		is Exercised
Canadian Pacific Railway Company		Canada		100%		Not applicable
Soo Line Corporation (2)		Minnesota		100%		Not applicable
Soo Line Railroad Company (3)		Minnesota		100%		Not applicable
Dakota Minnesota & Eastern Railroad Corporation (4)		Delaware		100%		Not applicable
Delaware and Hudson Railway Company, Inc. (2)		Delaware		100%		Not applicable
Mount Stephen Properties Inc.(5)		Canada		100%		Not applicable

(1)		This table does not include all of our subsidiaries. The assets and revenues of unnamed subsidiaries did not exceed 10% of the total consolidated assets or total consolidated revenues of CP individually, or 20% of the total consolidated assets or total consolidated revenues of CP in aggregate.
(2)		Indirect wholly owned subsidiary of Canadian Pacific Railway Company.
(3)		Wholly owned subsidiary of Soo Line Corporation.
(4)		Indirect wholly owned subsidiary of the Soo Line Corporation.
(5)		Wholly owned subsidiary of Canadian Pacific Railway Company.

Dakota, Minnesota & Eastern Railroad Corporation (“DM&E”) was acquired in October 2007 subject to approval by the US Surface Transportation Board (“STB”) and is an indirect wholly owned subsidiary of the Soo Line Corporation. The STB approved the application to acquire control on September 30, 2008. The official effective date of the final decision was October 30, 2008.

SECTION 3: GENERAL DEVELOPMENT OF THE BUSINESS

3.1 Recent Developments

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, strategic additions 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 2009, CP was focused on re-evaluating the structure of our business. We continue with cost reduction strategies including “Execution Excellence for Efficiency” (or “E3”), which was the beginning of our larger variable cost initiatives, our structural cost reduction initiative and the application of lean management techniques to our core operation processes.

2009 was also a year to focus on strengthening our balance sheet which included issuing equity in the first quarter of 2009. As well, we made a cash tender for outstanding debt and issued new debt to lengthen our maturity profile, smooth our repayment profile and strengthen near term liquidity. CP managed working capital and opportunistically selling non-core assets.

In the fourth quarter of 2009, CP terminated a contract with a lessee in order to cease through-train operations over the CP owned rail branchline between Smiths Falls and Sudbury. Improved train efficiencies now allow us to move this service over our main line rather than using this bypass route. CP also made a voluntary prepayment to our defined benefit pension plan to reduce the volatility of future pension funding requirements.

In the third quarter of 2009, the Company sold several significant properties including Windsor Station in Montreal, Quebec and land in Western Canada for transit purposes. CP will continue to occupy a portion of Windsor Station through a lease for a 10-year period after the sale.

Also in 2009, the Company completed a sale of a portion of its investment in the Detroit River Tunnel Partnership (“DRTP”) to its existing partner, reducing the Company’s ownership from 50% to 16.5%. Effective April 1, 2009, the Company discontinued proportionate consolidation and is accounting for its remaining investment in the DRTP under the equity method of accounting. Running rights remain unchanged.

The Company assumed control of DM&E on October 30, 2008 following approval of its acquisition of DM&E by the STB. The addition of DM&E extended CP’s reach and increased its rail network, added new customers and expanded the service available to customers of both DM&E and CP. Freight revenues from DM&E are derived principally from transporting grain, industrial products, and coal. DM&E has the option, but not the obligation, to construct a railway line into the Powder River Basin (“PRB”) located in Wyoming, the largest thermal coal producing region in the United States. The decision to construct a railway line into the PRB will be made by the Company based on economic viability and supported by certain key conditions being met. In 2009, we have integrated DM&E into most of our major operating systems.

In late 2008, the product design and yield teams were grouped together in the “Strategy & Yield” department, with the objective of further enhancing margins and service reliability. This combined group will provide network capability in an effort to optimize demand, product offering, equipment and track utilization. The development of this coordinated approach to yield and operations planning is a key element of the larger Strategy & Yield mandate to coordinate CP’s strategy, yield, product design, interline, business development and network capacity functions.

In mid 2008, CP commenced a review of opportunities to accelerate the realization of benefits achievable from operating plan efficiency improvements. Known as “E3”, this initiative is intended to identify opportunities to reduce costs and improve product reliability. Train productivity, asset utilization, yard and terminal operations, maintenance and product reliability have been the focus of this review.

During the first half of 2007, we announced our intention to assemble a rail corridor to access the Alberta Industrial Heartland northeast of Edmonton that serves the Alberta oilsands development. During 2008, the Company filed its application with the Canadian Transportation Agency to initiate the regulatory permitting process for construction of the rail corridor.

SECTION 4: DESCRIPTION OF THE BUSINESS

4.1 Our Background and Network

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. From our inception 129 years ago, we have developed into a fully integrated and technologically advanced Class I railway (a railroad earning a minimum of US$401.4 million in revenues annually) providing rail and intermodal freight transportation services over a 15,400-mile network serving the principal business centres of Canada, from Montreal, Quebec, to Vancouver, B.C., and the US Midwest and Northeast regions.

We own approximately 10,700 miles of track. An additional 4,700 miles of track are owned jointly, leased or operated under trackage rights. Of the total mileage operated, approximately 6,200 miles are located in western Canada, 2,200 miles in eastern Canada, 5,800 miles in the US Midwest and 1,200 miles in the US 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 I 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 Metro Vancouver in Vancouver, B.C., respectively.

Our network accesses the US market directly through three wholly owned subsidiaries: Soo Line Railroad Company (“Soo Line”), a Class I railway operating in the US Midwest; DM&E, a wholly owned subsidiary of the Soo Line, which operates in the US Midwest and the Delaware and Hudson Railway Company, Inc. (“D&H”), which operates between eastern Canada and major US Northeast markets, including New York City, New York; Philadelphia, Pennsylvania; and Washington, D.C.

4.2 Strategy

Our vision is to become the safest and most fluid railway in North America. Through the ingenuity of our people, it is our objective to create long-term value for customers, shareholders and employees. We seek to accomplish this objective through the following three-part strategy:

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

4.3 Partnerships, Alliances and Network Efficiency

Some customers’ goods may have to travel on more than one railway to reach their final destination. The transfer of goods between railways 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 and rail car fleets, these strategies enable us to achieve more predictable and fluid train operations between major terminals.

Over the past few years Class I railway initiatives have included:

	•		a CP-Canadian National (“CN”) haulage agreement under which we transport CN freight over about 300 miles of CP track in Ontario between Thunder Bay and Franz;
	•		CP-CN initiatives in the Port Metro Vancouver Terminal and B.C. Lower Mainland;
	•		CP-CN directional running operations in the B.C. Fraser Canyon;
	•		A joint routing agreement with CN to establish a structured plan to direct flows of interline traffic through the most efficient interchange locations and compliment similar arrangements with other Class I’s Union Pacific Railroad (“UP”) & Burlington Northern Santa Fe Railway (“BNSF”); and
	•		CP has worked very closely with all the Class I and other carriers that serve Chicago under the Chicago Region Environmental and Transportation Efficiency (“CREATE”) program. Class I’s, Amtrak, Metra and switching carriers

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Indiana Harbor Belt Railroad (“IHB”) and Belt Railway of Chicago (“BRC”) have partnered up on CREATE to initiate operating and structural changes that will improve operating efficiency and fluidity in and around Chicago, creating the largest railroad hub in North America.

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

4.4 Network and Right-of-Way

Our 15,400-mile network extends from the Port Metro Vancouver on Canada’s Pacific Coast to the Port of Montreal in eastern Canada, and to the US industrial centres of Chicago, Illinois; Newark, New Jersey; Philadelphia, Pennsylvania; New York City and Buffalo, New York; Kansas City, Missouri; and Minneapolis, Minnesota.

Our network is composed of four primary corridors (Western, Southern, Central, and Eastern) and DM&E.

4.4.1 The Western Corridor: Vancouver-Moose Jaw

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 US 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 Metro 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”, which links southeastern B.C. coal deposits to the Western Corridor and to the Roberts Bank terminal at the Port Metro Vancouver; the “Calgary-Edmonton-Scotford Route”, which provides rail access to central Alberta’s Industrial Heartland in addition to the petrochemical complex in central Alberta; and the “Pacific CanAm Route”, which connects Calgary and Medicine Hat, Alberta, with UP at Kingsgate, B.C.

Connections — Our Western Corridor connects with UP at Kingsgate and with BNSF at Coutts, Alberta, and at New Westminster and Huntingdon in B.C. This corridor also connects with CN at Red Deer, Camrose, Calgary, Edmonton, Alberta; Kamloops, B.C.; and several locations in the Greater 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.

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4.4.2 The Southern Corridor: Moose Jaw-Chicago

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 US Midwest.

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

Feeder Lines — We have operating rights over the BNSF line between Minneapolis and the twin ports of Duluth, Minnesota and Superior, Wisconsin. CP maintains its own yard facilities at the twin ports that provide an outlet for grain from the US Midwest to the grain terminals at these ports, and a strategic entry point for large dimensional shipments that can be routed via CP’s network to locations such as Alberta’s Industrial Heartland to serve the growing needs of the oil sands and energy industry.

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 and with UP at St. Paul. We 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 US.

Yards and Repair Facilities — We support rail operations on the Southern Corridor with main rail yards in Chicago, Milwaukee, 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.

4.4.3 The Central Corridor: Moose Jaw-Montreal

Overview — The Central Corridor extends from Moose Jaw through Winnipeg to its eastern terminus at Montreal. 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 in 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, Saskatchewan. This line is an important collector of Canadian grain and fertilizer, and provides direct access to refining and upgrading facilities in Alberta’s Industrial Heartland and at Lloydminster.

Connections — The Central Corridor connects with BNSF at Emerson, Manitoba, and with a number of shortline railways. Connections are also made with the CN at a number of locations, including Regina, Saskatoon, Winnipeg, Thunder Bay, Sudbury, Toronto and Montreal.

Yards and Repair Facilities — We support our rail operations in 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 Winnipeg, Saskatoon and Regina.

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

4.4.4 The Eastern Corridor: Montreal to Chicago/ New York

Overview — The Eastern Corridor provides an important link between the major population centres of eastern Canada, the US Midwest and the US 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 US Midwest. The Eastern Corridor consists of a route between Montreal and Windsor, which we own and maintain, coupled with running rights between Windsor and Detroit, a trackage rights arrangement on Norfolk Southern Corporation (“NS”) track between Detroit and Chicago and a long-term rail car haulage contract with CSX Corporation (“CSX”) that links Detroit with our lines in Chicago.

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Products — Major traffic categories transported in the Eastern Corridor include intermodal containers, automotive, forest, and industrial and consumer products, as well as truck trailers moving in drive-on/drive-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 and Albany, New York; Philadelphia, Pennsylvania; 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 US 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, Quebec and at Toronto, Windsor and London in Ontario. Shortline connections exist with multiple players throughout the corridor including routes from Montreal to Quebec City, and Montreal to St. John, New Brunswick.

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

4.4.5 The Dakota, Minnesota & Eastern Railroad Corporation

Overview — DM&E is a Class II railroad with approximately 2,500 miles of track, including approximately 500 miles of trackage rights, in the US Midwest and primary customers in agri-products and merchandise. DM&E has connections to and traffic interchanges with all seven Class I railroads and is proximate to the PRB located in Wyoming, the largest thermal coal producing region in the United States.

Products — Primary traffic categories transported on DM&E include industrial and consumer products, grain, coal, fertilizers and forest products.

Feeder Lines — The acquisition of DM&E provides a strategic end-to-end network fit extending CP’s network reach and increasing operational efficiency. DM&E connects with the Southern Corridor at Minneapolis, Winona, Minnesota and Chicago. The railway operates in eight states and has direct access to Chicago, Minneapolis, Kansas City (Missouri), and to critical water ports.

Connections — DM&E has the ability to interchange with all of the seven Class I railroads operating in the United States. The east portion of the line provides additional access to Chicago where as the south portion of the rail extends to Kansas City. DM&E is also located favourably to the PRB.

Yards and Repair Facilities — We support our rail operations of DM&E with major rail yards and locomotive repair shops in Mason City, Iowa; Nahant, Iowa; and Huron, South Dakota.

4.4.6 Right-of-Way

Our rail network is standard gauge, which is used by all major railways in Canada, the US and Mexico. Continuous welded rail is used on almost all of our mainline.

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

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

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4.5 Quarterly Trends

Quarterly fluctuations in trends caused by the 2009 global recession have and will continue to cause our results and volumes to be inconsistent with the sensitivity and trends provided below. Management believes that the changes in economic conditions in 2009 will continue to affect the quarterly fluctuation in 2010; the timing of a return to the sensitivity and trends discussed will depend on the recovery of the economy and our customers.

Volumes of and, therefore, revenues from certain goods are stronger during different periods of the year. First-quarter revenues can be lower mainly due to winter weather conditions, closure of the Great Lakes ports and reduced transportation of retail goods. Second- and third-quarter revenues generally improve over the first quarter as fertilizer volumes are typically highest during the second quarter and demand for construction-related goods is generally highest in the third quarter. Revenues are typically strongest in the fourth quarter, primarily as a result of the transportation of grain after the harvest, fall fertilizer programs and increased demand for retail goods moved by rail. Operating income is also affected by seasonal fluctuations. Operating income is typically lower in the first quarter dependent on winter conditions. Net income is also influenced by seasonal fluctuations in customer demand and weather-related issues.

4.6 Business Categories

The following table compares the percentage of our total freight revenue derived from each of our major business lines in 2009 compared with 2008:

Business Category		2009				2008(1)
Bulk			45	%			43	%
Merchandise			28	%			28	%
Intermodal			27	%			29	%

(1) Figures include DM&E from October 30, 2008 to December 31, 2008.

4.7 Revenues

The following table summarizes our annual freight revenues since 2007:

Freight Revenues						Fiscal 2009								Fiscal 2008(1)
(in $ millions, except for percentages)		Fiscal				Compared				Fiscal				Compared				Fiscal
		2009				to Fiscal				2008(1)				to Fiscal				2007
Business Category						2008(1)								2007
Bulk
Grain			1,129.9				16.5	%			970.0				3.3	%			938.9
Coal			443.3				(27.0	)%			607.5				5.9	%			573.6
Sulphur and fertilizers			303.5				(40.3	)%			508.6				1.3	%			502.0
Total bulk			1,876.7				(10.0	)%			2,086.1				3.6	%			2,014.5
Merchandise
Forest products			173.2				(27.6	)%			239.3				(13.2	)%			275.8
Industrial and consumer products			766.6				0.1	%			766.1				22.0	%			627.9
Automotive			228.8				(29.3	)%			323.5				1.4	%			319.0
Total merchandise			1,168.6				(12.1	)%			1,328.9				8.7	%			1,222.7
Intermodal			1,129.9				(19.3	)%			1,399.8				6.2	%			1,318.0
Total freight revenues			4,175.2				(13.3	)%			4,814.8				5.7	%			4,555.2

(1) Revenues include DM&E from October 30, 2008 to December 31, 2008.

4.7.1 Bulk

Our bulk business represented approximately 45% of total freight revenues in 2009.

4.7.1.1 Grain

Our grain business accounted for approximately 27% of total freight revenues in 2009.

SECTION 4: DESCRIPTION OF THE BUSINESS

Grain transported by CP consists of both whole grains, such as wheat, corn, soybeans and canola, and processed products, such as canola meals, soybean oils and flour.

Our grain business is centred in two key agricultural areas: the Canadian prairies (Alberta, Saskatchewan and Manitoba) and the states of North Dakota, Minnesota, Iowa and South Dakota. Western Canadian grain is shipped primarily west to the Port Metro Vancouver and east to the Port of Thunder Bay for export. Grain is also shipped to the US Midwest and to eastern Canada for domestic consumption. US-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 US Pacific Northwest and the Gulf of Mexico. Grain destined for domestic consumption moves east via Chicago to the US Northeast or is interchanged with other carriers to the US Southeast, Pacific Northwest and California markets.

Railway revenues for the movement of export grain from western Canada are subject to 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 Section 21.4.1 of our 2009 Management’s Discussion and Analysis (“MD&A”), which is available on SEDAR at www.sedar.com in Canada, on EDGAR at www.sec.gov in the US and on our website at www.cpr.ca.

4.7.1.2 Coal

Our coal business represented approximately 11% of total freight revenues in 2009.

We handle mostly metallurgical coal destined for export through the Port Metro 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, the US for midwest markets, and east for consumption in steel-making mills along the Great Lakes.

In the US, we move primarily thermal coal from the PRB, which is interchanged to us from other carriers, for use in power-generating plants. Our US coal business also includes petroleum coke shipments to power-generating facilities.

4.7.1.3 Sulphur and Fertilizers

Sulphur and fertilizers business represented approximately 7% of total freight revenues in 2009.

Sulphur
Most sulphur is produced in Alberta as 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 manufacturing of sulphuric acid, which is used most extensively in the production of phosphate fertilizers. 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 more than 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 Metro 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 destined mainly to China and Australia. In addition, we transport liquid sulphur from Scotford, Alberta, site of one of the largest refineries in the Edmonton area, and from other origins to the southeastern and northwestern US for use in the fertilizer industry.

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

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We provide transportation services from major potash and nitrogen production facilities in western Canada and have efficient routes to the major US 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, as well as access to Great Lakes vessels at Thunder Bay.

4.7.2 Merchandise

Our merchandise business represented approximately 28% of total freight revenues in 2009.

Merchandise products move in trains of mixed freight and in a variety of car types. Service involves delivering products to many different customers and destinations. In addition to traditional rail service, we move merchandise traffic through a network of truck-rail transload facilities and provide logistics services.

4.7.2.1 Forest Products

Our forest products business represented approximately 4% of total freight revenues in 2009.

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.

4.7.2.2 Industrial and Consumer Products

Our industrial and consumer products business represented approximately 18% of total freight revenues in 2009.

Industrial and consumer products traffic include a wide array of commodities grouped under chemicals, energy and plastics as well as mine, metals and aggregates.

Our industrial and consumer products traffic is widely dispersed throughout North America, with large bases in Alberta, Ontario, Quebec and the US 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, including to and from ports. We also participate in the movement of products from the US to Canadian destinations, including chemicals originating in and around the Gulf Coast and destined to points in eastern Canada.

4.7.2.3 Automotive

Our automotive business represented approximately 6% of total freight revenues in 2009.

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

4.7.3 Intermodal

Our intermodal business accounted for approximately 27% of total freight revenues in 2009.

Domestic intermodal freight consists primarily of manufactured consumer products moving in containers. International intermodal freight moves in marine containers to and from ports and North American inland markets.

Domestic Intermodal
Our domestic intermodal segment covers a broad spectrum of industries including food, retail, less-than truckload shipping, trucking, forest products and various other consumer-related products. 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 US, our service is delivered mainly through wholesalers.

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

We are a major carrier of containers moving via the ports in Montreal and Vancouver. Import traffic from the Port Metro Vancouver is mainly long-haul business destined for eastern Canada and the US Midwest and Northeast. Our trans-Pacific service offers the shortest route between the Port Metro 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 US Midwest. Our US 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 as well as operating and service initiatives have enhanced our strategic position for future growth.

4.7.4 Other Business

We earn additional revenues through the sale and lease of assets and other arrangements including logistical services, contracts with passenger service operators and investments in joint rail operations.

4.7.5 Significant Customers

In 2009, no one customer comprised more than 10% of total revenues and accounts receivable. For the year ended and as at December 31, 2008 and 2007, one customer comprised 11.3% and 11.5% of total revenues and 1.7% and 6.7% of total accounts receivable, respectively.

4.8 Railway Performance

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

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4.8.1 Performance Indicators

		Year Ended December 31
Performance Indicators(1)		2009				2008				2007				2006				2005
Consolidated Data Including DM&E(2)
Efficiency and other indicators
Gross ton-miles (GTM) (millions)(3)			209,475				239,705				246,322				236,405				242,100
Train miles (thousands)			34,757				41,420				42,804				42,310				43,054
US gallons of locomotive fuel per 1,000 GTMs — freight and yard(4)			1.19				1.22				1.21				1.20				1.18
Average number of active employees — expense(5)			13,619				14,340				14,172				14,311				14,793
CP Data excluding DM&E
Efficiency and other indicators
Car miles per car day(6)			142.6				143.6				142.3				137.3				124.0
Average train speed (miles per hour)(7)			25.5				24.0				23.2				24.8				22.0
Average terminal dwell (hours)(8)			21.9				22.3				22.2				20.8				25.8
Safety indicators
FRA personal injuries per 200,000 employee-hours(9)			1.85				1.51				2.09				2.00				2.38
FRA train accidents per million train-miles(10)			1.49				1.93				2.05				1.56				2.26
DM&E Data only
FRA personal injuries per 200,000 employee-hours(9)			2.17				3.50				—				—				—
FRA train accidents per million train-miles(10)			6.78				11.39				—				—				—

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4.9 Franchise Investment

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. On an accrual basis, we invested approximately $2.39 billion in our core assets from 2007 to 2009, with annual capital spending over this period averaging approximately 17% of revenues. This included approximately $1.81 billion invested in track and facilities, $0.14 billion in locomotives, $0.16 billion in information technology and $0.28 billion in freight cars and other equipment.

4.9.1 Locomotive Fleet

Our locomotive fleet includes high-adhesion alternating current (“AC”) locomotives, which are more fuel efficient and reliable and have superior hauling capacity compared with standard direct current (“DC”) locomotives. Our locomotive fleet now includes 732 AC locomotives. While AC locomotives represent approximately 61% of our road-freight locomotive fleet, they handle about 89% of our workload. Our investment in AC locomotives has helped to improve service reliability and generate cost savings in fuel, equipment rents and maintenance.

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

Number of Locomotives (owned and long-term leased)

		Road Freight								Road				Yard
Age in Years		AC				DC				Switcher				Switcher				Total
0-5			234				—				2				—				236
6-10			184				—				—				—				184
11-15			314				—				—				—				314
16-20			—				21				—				—				21
Over 20			—				452				276				226				954
Total			732				473				278				226				1,709

4.9.2 Railcar Fleet

We own, lease or manage approximately 53,200 freight cars. Approximately 17,400 are owned by CP, approximately 7,200 are hopper cars owned by Canadian federal and provincial government agencies and approximately 11,700 are short-term lease and 16,900 are long-term leased. Short-term leases on approximately 4,500 cars are scheduled to expire during 2010, and the leases on approximately 8,000 additional cars are scheduled to expire before the end of 2014.

Our covered hopper car fleet, used for transporting regulated grain, consists of owned, leased and managed cars. A portion of the fleet used to transport export grain is leased from the Government of Canada, with whom we completed an operating agreement in 2007.

4.10 Integrated Operating Plan (“IOP”)

Our IOP is the foundation for our scheduled railway operations, through which we strive to provide quality service for customers and improve asset utilization to achieve high levels of efficiency. The key principles upon which our IOP is built include moving freight cars across the network with as few handlings as possible, creating balance in directional flow of trains in our corridors by day of week, and minimizing the time that locomotives and freight cars are idle.

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, track renewal and material supply.

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We have capitalized on the new capabilities of our network, our upgraded locomotive fleet and our new Train Area Marshalling software tool (“TrAM”) to safely 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 additional efficiencies that will enable further growth without the need to incur significant capital expenditures to accommodate the growth. During 2009, execution of our IOP generated productivity and efficiency improvements that reduced expenses in key areas, while improving service reliability to support rate increases and grow market share. Areas of expense reduction included labour, purchased services and equipment costs.

The “E3” review that commenced in mid-2008 is an initiative intended to accelerate benefits related to IOP efficiency, to reduce costs and to improve reliability of CP’s product. Train productivity, asset utilization, yard and terminal operations, maintenance and product reliability have been the focus of this review.

In late 2008, the IOP and Yield teams were grouped together in the “Strategy & Yield” department. This combined group is providing network capability in an effort to optimize demand, product offering, equipment and track utilization.

4.11 Information Technology

As a 24-hour-a-day, 7-day-a-week business, CP relies heavily on information technology (“IT”) systems to schedule and manage planning and operational components safely and efficiently. IT 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. Across the network, CP’s suite of operating systems manage the overall movement of customers’ shipments and provide railway employees with reliable data on shipment performance, transit times, connections with other trains, train and yard capacities, and locomotive requirements. Within the yards, individual shipments are matched to freight car blocks, which in turn are matched to trains that are scheduled according to CP’s IOP.

MultiRail

Core to CP’s success has been the innovative and industry-leading use of a product design software tool called MultiRail. MultiRail is a fully-integrated application that allows CP to refine and evaluate our operating plan strategy. It creates and communicates a balanced plan to accommodate shippers’ needs, operational considerations and asset utilization.

The Institute for Operations Research and the Management Sciences selected CP, in partnership with Multimodal Applied Systems Inc., as the winner of the prestigious 2003 Franz Edelman Award. CP was selected for its work on “Perfecting the Scheduled Railway: Model Driven Operating Plan Development.”

CP has modeled the IOP within the MultiRail application using forward-looking traffic data. The full integration of the design process with our operation control systems allows us to move from the planning phase into the execution phase and to react quickly and efficiently to changing business conditions and opportunities.

Train Area Marshalling (“TrAM”)

CP has also introduced TrAM, a comprehensive set of train marshalling rules and supporting computer tools that have enabled CP to become the industry leader in the use of distributed power. CP is utilizing this technology on as many trains as possible beyond its traditional use in bulk train service alone. TrAM provides the science to position multiple remote locomotives in specific locations within a train. By positioning remote locomotives, we keep in-train forces within acceptable limits which optimizes safety and reduces unnecessary equipment wear when compared to conventional head-end power only or trains with just one remote locomotive location. Multiple remote distributed trains produce significantly lower lateral forces on the track, which represents an opportunity to improve safety, dramatically extend rail-asset-life and reduce fuel consumption. TrAM abilities have also allowed CP to take advantage of implementing its long train strategy which during 2009 has enhanced the productivity of its transcontinental train services by allowing safe operation of longer, heavier train designs.

SECTION 4: DESCRIPTION OF THE BUSINESS

Truck Rail Intermodal Excellence (“TRIEX”)

CP recently implemented the TRIEX system at all intermodal facilities. The system will further improve intermodal service by providing customer self-service, proof of delivery and full shipment tracking. TRIEX will also provide more sophisticated pricing options and simplify billing processes.

Mycpr.ca

A multi-year program to revamp e-business applications is underway to provide customers with an industry leading electronic commerce capability. The next phase will see the launch of a new version of CP’s customer website, myCPR.ca. This new tool will allow customers to manage all aspects of their shipments from initial price inquiries, car ordering, shipment tracking, invoice viewing and payment.

Engineering Excellence

CP is making significant technology investments in Engineering Excellence to ensure continued network safety and reliability. A new bridge inspection system allows employees to capture inspection results electronically in the field, reducing the amount of time spent documenting inspection results and increasing the quality of information gathered about the condition of each asset. Engineering Excellence ensures timely maintenance, improved infrastructure renewal planning and assured compliance to regulatory requirements.

Equipment Health Management System (“EHMS”)

The EHMS is a multi-year project that supports the railway industry’s Advanced Technology Safety Initiative to reduce stress on railway infrastructure. The system allows freight car equipment owners to monitor and maintain their fleet proactively. We recently added truck hunting detectors and hot box detector information and alerting to our EHMS system.

4.12 Labour Productivity and Efficiency

CP believes employees contribute best when the organizational structure is lean and accountabilities are clear. Companies only attain their full potential when they engage employees intelligence and creativity in a structured manner that becomes part of the fabric of the company.

In the past few years CP has initiated a number of strategic organizational initiatives to achieve these conditions. In 2009, we commenced a holistic review of our management structure. Its implementation will see a leaner more defined CP.

Building on the successes of our “E3” variable cost reduction initiative, CP has commenced the structured implementation of “lean process/kaizen” principles into the organization. This continuous improvement, high employee engagement methodology is already providing new, actionable efficiency and service insights.

To link employee performance and organizational outcomes, CP also uses performance based programs designed to allow eligible unionized and non-unionized employees to share in the profits they help generate.

4.13 Business Risks and Enterprise Risk Management

In the normal course of our operations, we are exposed to various business risks and uncertainties that can have an effect on our financial condition. The risks and our enterprise risk management are discussed in Section 21.0 Business Risks and Enterprise Risk Management of our 2009 MD&A, which is available on SEDAR at www.sedar.com in Canada, on EDGAR at www.sec.gov in the US and on our website at www.cpr.ca.

4.14 Indemnifications

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, 2009, we had not recorded a liability associated with this indemnification, as we do not expect to make any payments pertaining to it.

SECTION 4: DESCRIPTION OF THE BUSINESS

Pursuant to our by-laws, we indemnify all our current and former directors and officers. In addition to the indemnity provided by our by-laws, we also indemnify our directors and officers pursuant to indemnity agreements. 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.

4.15 Safety

Safety is a key priority for our management and Board of Directors. Our two main safety indicators — personal injuries and train accidents — follow strict US Federal Railroad Administration (“FRA”) reporting guidelines.

The FRA personal injury rate per 200,000 employee-hours for CP, excluding DM&E was 1.85 in 2009, an increase from 1.51 in 2008 and an improvement from 2.09 in 2007. The FRA train accident rate for CP, excluding DM&E in 2009 was 1.49 accidents per million train-miles, compared with 1.93 in 2008 and 2.05 in 2007. CP strives to continually improve its safety performance through ten key strategies and activities such as training and technology. 2009 represents CP’s second lowest personal injury rate and our lowest train accident rate.

The FRA personal injury rate per 200,000 employee-hours for DM&E was 2.17 in 2009 compared with 3.50 in 2008. The FRA train accident rate for DM&E was 6.78 in 2009 and 11.39 in 2008. Significant improvement has been realized driven by the implementation of the safety integration plan.

Our Health, Safety, Security and Environment 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 all of the most senior representatives from our different operations departments and is a key component of safety governance at CP. 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.

4.16 Environmental Protection

We have implemented a comprehensive Environmental Management System, 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.

4.16.1 Policy

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 Chemistry Industry Association of Canada and the American Chemistry Council (“ACC”) in the US, 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 and again in 2008. Our next Chemistry Industry Association of Canada and ACC Responsible Care verification is tentatively scheduled for June 2011.

4.16.2 Planning

We prepare an annual Corporate Environmental Plan and an Operations Environment Plan, which include details of our environmental goals and targets as well as high-level strategies. These plans are used by various departments to integrate key corporate environmental strategies into their business plans.

4.16.3 Implementation and Operation

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.

SECTION 4: DESCRIPTION OF THE BUSINESS

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 US 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.

4.16.4 Environmental Contamination

We continue to be responsible for remediation work on portions of the property in the State of Minnesota and continue to retain liability accruals for remaining future anticipated costs. The costs are expected to be incurred over approximately 10 years. The state’s voluntary investigation and remediation program will oversee the work to ensure it is completed in accordance with applicable standards. We currently estimate the remaining liability associated with these areas to be US$25.5 million.

4.16.5 Checking and Corrective Action

Our environmental audit comprehensively, systematically and regularly assesses our facilities for compliance with legal and regulatory 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 process that ensures findings are addressed in a timely manner. Progress is monitored against completion targets and reported quarterly to senior management.

In 2007, our audit program was expanded to include health and safety.

4.16.6 Management Review

Our Board of Directors’ Health, Safety, Security and Environment Committee 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, Sales and Marketing, Finance, Operations, Supply Services, and Safety and Environmental Services departments, meets quarterly to review environmental matters.

4.16.7 Expenditures

We spent $47 million in 2009 for environmental management, including amounts spent for ongoing operations, fuel conservation, capital upgrades and remediation.

4.17 Insurance

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. However, in certain circumstances, certain losses may not be covered or completely covered by insurance and we may suffer losses, which could be material.

SECTION 5: DIVIDENDS

5.1 Declared Dividends and Dividend Policy

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

Dividend Amount		Record Date		Payment Date
$0.2250		March 30, 2007		April 30, 2007
$0.2250		June 29, 2007		July 30, 2007
$0.2250		September 28, 2007		October 29, 2007
$0.2250		December 28, 2007		January 28, 2008
$0.2475		March 28, 2008		April 28, 2008
$0.2475		June 27, 2008		July 28, 2008
$0.2475		September 26, 2008		October 27, 2008
$0.2475		December 24, 2008		January 26, 2009
$0.2475		March 27, 2009		April 27, 2009
$0.2475		June 26, 2009		July 27, 2009
$0.2475		September 25, 2009		October 26, 2009
$0.2475		December 31, 2009		January 25, 2010
$0.2475		March 26, 2010		April 26, 2010

Our Board of Directors is expected to give consideration on a quarterly basis to the payment of future dividends. The amount of any future quarterly dividends will be determined based on a number of factors that may include the results of operations, financial condition, cash requirements and future prospects of the Company. The Board of Directors is, however, under no obligation to declare dividends and the declaration of dividends is wholly within their 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.

SECTION 6: CAPITAL STRUCTURE

6.1 Description of Capital Structure

The Company is authorized to issue an unlimited number of Common Shares, an unlimited number of First Preferred Shares and an unlimited number of Second Preferred Shares. At December 31, 2009, no Preferred Shares had been issued.

1)

The rights, privileges, restrictions and conditions attaching to the Common Shares are as follows:

	a)		Payment of Dividends: The holders of the Common Shares will be entitled to receive dividends if, as and when declared by CP’s Board of Directors out of the assets of the Company properly applicable to the payment of dividends in such amounts and payable in such manner as the Board may from time to time determine. Subject to the rights of the holders of any other class of shares of the Company entitled to receive dividends in priority to or rateably with the holders of the Common Shares, the Board may in its sole discretion declare dividends on the Common Shares to the exclusion of any other class of shares of the Company.
	b)		Participation upon Liquidation, Dissolution or Winding Up: In the event of the liquidation, dissolution or winding up of the Company or other distribution of assets of the Company among its shareholders for the purpose of winding up its affairs, the holders of the Common Shares will, subject to the rights of the holders of any other class of shares of the Company entitled to receive the assets of the Company upon such a distribution in priority to or rateably with the holders of the Common Shares, be entitled to participate rateably in any distribution of the assets of the Company.
	c)		Voting Rights: The holders of the Common Shares will be entitled to receive notice of and to attend all annual and special meetings of the shareholders of the Company and to one (1) vote in respect of each Common Share held at all such meetings, except at separate meetings of or on separate votes by the holders of another class or series of shares of the Company.

2)

The rights, privileges, restrictions and conditions attaching to the First Preferred Shares are as follows:

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

SECTION 6: CAPITAL STRUCTURE

3)

The rights, privileges, restrictions and conditions attaching to the Second Preferred Shares are as follows:

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

6.2 Security Ratings

The Company’s 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, shown in the table below:

			Long-Term
	Approved Rating		Debt
	Organization		Rating
	Moody’s Investors Service		Baa3
	Standard & Poor’s Corporation		BBB
	Dominion Bond Rating Service		BBB

The Standard & Poor’s Corporation has a negative outlook, while the Moody’s Investors Service and Dominion Bond Rating Service have a stable outlook.

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.

SECTION 6: CAPITAL STRUCTURE

The following table summarizes rating categories for respective rating agencies:

				Dominion
Moody’s				Bond
Investors		Standard		Rating
Service		& Poor’s		Service
Aaa		AAA		AAA				High Investment Grade
Aa1		AA+		AA(high)
Aa2		AA		AA
Aa3		AA-		AA(low)
A1		A+		A(high)
A2		A		A
A3		A-		A(low)
								Investment Grade
Baa1		BBB+		BBB(high)
Baa2		BBB		BBB
Baa3		BBB-		BBB(low)
Ba1		BB+		BB(high)				Below Investment Grade
Ba2		BB		BB
Ba3		BB-		BB(low)
B1		B+		B(high)
B2		B		B
B3		B-		B(low)
Caa		CCC		CCC
Ca		CC		CC
C		C		C

SECTION 7: MARKET FOR SECURITIES

7.1 Stock Exchange Listings

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

7.2 Trading Price and Volume

The following table provides the monthly trading information for our Common Shares on the Toronto Stock Exchange during 2009:

		Opening				High				Low				Closing				Volume of
Month		Price per				Price per				Price per				Price per				Shares
		Share ($)				Share ($)				Share ($)				Share ($)				Traded
January			41.18				46.09				35.65				37.22				17,888,292
February			36.75				40.73				33.85				36.00				18,381,125
March			35.50				40.77				32.36				37.52				18,480,834
April			36.89				44.49				36.80				42.70				17,272,564
May			42.94				46.69				40.05				44.40				12,159,714
June			44.97				48.41				42.50				46.38				13,671,593
July			46.18				48.90				38.35				47.90				19,086,785
August			48.95				55.96				48.76				52.42				10,938,822
September			51.95				54.48				49.37				50.10				12,911,527
October			50.23				50.84				45.41				46.90				11,792,086
November			46.56				53.22				46.43				50.97				8,003,124
December			52.74				58.17				51.50				56.79				8,507,339

The following table provides the monthly trading information for our Common Shares on the New York Stock Exchange during 2009:

		Opening				High				Low				Closing				Volume of
Month		Price per				Price per				Price per				Price per				Shares
		Share ($)				Share ($)				Share ($)				Share ($)				Traded
January			33.81				38.98				28.15				30.26				12,836,132
February			29.64				33.18				27.07				28.21				11,182,010
March			27.56				33.10				25.11				29.63				11,703,105
April			29.26				37.29				29.19				35.86				10,267,837
May			36.05				41.13				34.10				40.94				9,494,588
June			41.35				43.91				37.28				39.80				8,490,151
July			40.36				45.11				32.96				44.49				8,287,929
August			45.70				51.64				44.46				47.86				6,952,194
September			47.36				51.00				44.55				46.75				8,967,769
October			46.83				48.86				42.05				43.11				9,159,843
November			43.18				50.44				43.04				48.46				6,235,945
December			50.11				55.43				49.31				54.00				6,886,290

SECTION 8: DIRECTORS AND OFFICERS

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.

8.1 Directors

Name and Municipality of Residence		Position Held and Principal Occupation within		Year of Annual Meeting
		the Preceding Five Years(1)		at which Term of Office
				Expires (Director
				Since)
J.E. Cleghorn, O.C., F.C.A. (3) Toronto, Ontario, Canada		Chairman, Canadian Pacific Railway Limited and Canadian Pacific Railway Company		2010 (2001)
T.W. Faithfull (3)(4)(5) Oxford, Oxfordshire, England		Retired President and Chief Executive Officer Shell Canada Limited (oil and gas company)		2010 (2003)
F.J. Green (4) Calgary, Alberta, Canada		President and Chief Executive Officer, Canadian Pacific Railway Company and Canadian Pacific Railway Limited		2010 (2006)
K.T. Hoeg, C.A. (2)(6) Toronto, Ontario, Canada		Former President and Chief Executive Officer of Corby Distilleries Limited (spirits and wine)		2010 (2007)
Richard C. Kelly (2)(4) Minneapolis, Minnesota, U.S.A.		Chairman and Chief Executive Officer Xcel Energy Inc. (a utility supplier of electric power and natural gas)		2010 (2008)
The Hon. J.P. Manley (2)(3)(6) Ottawa, Ontario, Canada		President and Chief Executive Officer, Canadian Council of Chief Executives (non-profit public policy, consultation and advocacy organization)		2010 (2006)
L.J. Morgan (4)(5) Bethesda, Maryland, U.S.A.		Counsel, Covington & Burling LLP (law firm)		2010 (2006)
M. Paquin (4)(5) Montreal, Quebec, Canada		President and Chief Executive Officer, Logistec Corporation (international cargo-handling company)		2010 (2001)
M.E.J. Phelps, O.C. (3)(5)(6) West Vancouver, B.C., Canada		Chairman, Dornoch Capital Inc. (private investment company)		2010 (2001)
R. Phillips, O.C.,S.O.M., F.Inst.P. (2)(3)(6) Regina, Saskatchewan, Canada		Retired President and Chief Executive Officer, IPSCO Inc. (steel manufacturing company)		2010 (2001)
D.W. Raisbeck (2)(6) Sanibel, Florida, U.S.A.		Retired Vice-Chairman, Cargill Inc. (producer and marketer of agricultural, financial and industrial products)		2010 (2009)
H.T. Richardson, C.M., O.M. (5)(6) Winnipeg, Manitoba, Canada		President and Chief Executive Officer, James Richardson & Sons, Limited (privately owned corporation)		2010 (2006)
M.W. Wright (2)(3)(4) Longboat Key, Florida, U.S.A.		Retired Chairman of the Board and Chief Executive Officer, SUPERVALU INC. (food distributor and grocery retailer)		2010 (2001)

Notes:
(1)		J.E. Cleghorn was Chairman of the Board of SNC-Lavalin Group from May 2002 until May 2007. F.J. Green was President and Chief Operating Officer, Canadian Pacific Railway Company and Canadian Pacific Railway Limited from November 2005 until May 2006, Executive Vice-President and Chief Operating Officer, Canadian Pacific Railway Company and Canadian Pacific Railway Limited from

SECTION 8: DIRECTORS AND OFFICERS

		October 2004 until November 2005. K.T. Hoeg was President and Chief Executive Officer of Corby Distilleries Limited from October 1996 to February 2007. The Hon. J.P. Manley was the counsel for McCarthy Tetrault from July 2004 until October 2009 and President-Elect of the Canadian Counsel of Chief Executives from October to December 2009. R.C. Kelly was President of Xcel Energy Inc. from June 2005 to September 2009. D.W. Raisbeck was Vice-Chairman of Cargill Inc. from 1999 to 2009.
(2)		Member of the Audit, Finance and Risk Management Committee.
(3)		Member of the Corporate Governance and Nominating Committee.
(4)		Member of the Health, Safety, Security and Environment Committee.
(5)		Member of the Management Resources and Compensation Committee.
(6)		Member of the Pension Committee.

8.2 Cease Trade Orders, Bankruptcies, Penalties or Sanctions

As a result of the announcement in May 2004 by Nortel Networks Corporation and Nortel Networks Limited (collectively, the “Nortel Companies”) of the need to restate certain of their previously reported financial results and the resulting delays in filing interim and annual financial statements for certain periods by the required filing dates under Ontario securities laws, the Ontario Securities Commission made a final order on May 31, 2004 prohibiting all trading by directors, officers and certain current and former employees including J.E. Cleghorn and J.P. Manley, both former directors. The Quebec and Alberta Securities commissions issued similar orders. The cease trade order issued by the Ontario Securities Commission was revoked on June 21, 2005. The Quebec and Alberta orders were revoked shortly thereafter. Mr. Cleghorn and Mr. Manley were not subject to the Quebec and Alberta orders. Following the March 10, 2006 announcement by the Nortel Companies of the need to restate certain of their previously reported financial results and the resulting delay in the filing of certain 2005 financial statements by the required filing dates, the Ontario Securities Commission issued a final management cease trade order on April 10, 2006 prohibiting all of the directors, officers and certain current and former employees including Mr. Cleghorn and Mr. Manley from trading in the securities of the Nortel Companies. The British Columbia and Quebec Securities commissions issued similar orders. The Ontario Securities Commission lifted the cease trade order effective June 8, 2006 and the British Columbia and the Quebec Securities commissions also lifted their cease trade orders shortly thereafter. Mr. Cleghorn and Mr. Manley were not subject to the British Columbia and Quebec orders.

Mr. Manley was a director of the Nortel Companies when the Nortel Companies applied for and was granted creditor protection under the Companies’ Creditors Arrangement Act on January 14, 2009.

Mr. R. Kelly was President and Chief Executive Officer of NRG Energy, Inc. (“NRG”), a former subsidiary of Xcel Energy Inc. from June 6, 2002 to May 14, 2003, and a director of NRG from June 2000 to May 14, 2003. In May 2003, NRG and certain of NRG’s affiliates filed voluntary petitions for reorganization under Chapter 11 of the US Bankruptcy Code to restructure their debt. NRG emerged from bankruptcy on December 5, 2003.

SECTION 8: DIRECTORS AND OFFICERS

8.3 Senior Officers

As at March 15, 2010, the following were executive officers of CP:

Name and municipality of residence		Position held		Principal occupation within the
				preceding five years
J. E. Cleghorn, O.C., F.C.A. Toronto, Ontario, Canada		Chairman		Chairman, Canadian Pacific Railway Limited and Canadian Pacific Railway Company; Chairman, SNC-Lavalin Group Inc. (international engineering and construction firm)
F. J. Green Calgary, Alberta, Canada		President and Chief Executive Officer		President and Chief Executive Officer, Canadian Pacific Railway Company and Canadian Pacific Railway Limited; President and Chief Operating Officer, Canadian Pacific Railway Company and Canadian Pacific Railway Limited; Executive Vice-President and Chief Operating Officer, Canadian Pacific Railway Company and Canadian Pacific Railway Limited
K. B. McQuade Mesquite, Nevada, U.S.A.		Executive Vice- President and Chief Financial Officer		Executive Vice-President and Chief Financial Officer Canadian Pacific Railway Company and Canadian Pacific Railway Limited; Executive Vice-President and Chief Operating Officer, Canadian Pacific Railway Company and Canadian Pacific Railway Limited; Executive Vice-President and Chief Information Officer, Norfolk Southern Railroad
J. A. O’Hagan Calgary, Alberta, Canada		Senior Vice-President, Strategy and Yield		Senior Vice-President, Strategy and Yield, Canadian Pacific Railway Limited and Canadian Pacific Railway Company; Vice-President, Canadian Pacific Railway Limited and Vice-President, Strategy and External Affairs, Canadian Pacific Railway Company; Vice-President, Strategy Research and New Market Development, Assistant Vice-President, Strategy and Research, Canadian Pacific Railway Company
B. M. Winter Calgary, Alberta, Canada		Senior Vice-President, Operations		Senior Vice-President, Operations, Canadian Pacific Railway Limited and Senior Vice-President, Operations, Canadian Pacific Railway Company; Vice-President Operations, Canadian Pacific Railway Company; Vice-President Transportation and Field Operations, Canadian Pacific Railway Company
R. H. Foot Calgary, Alberta, Canada		Group Vice-President, Sales		Group Vice-President, Sales, Canadian Pacific Railway Company; Vice-President, Sales & Marketing, Merchandise, Canadian Pacific Railway Company

SECTION 8: DIRECTORS AND OFFICERS

Name and municipality of residence		Position held		Principal occupation within the
				preceding five years
J. Michael Franczak Calgary, Alberta, Canada		Group Vice-President, Operations		Vice-President Operations, Canadian Pacific Railway Company; Vice-President Transportation, Canadian Pacific Railway Company; Assistant Vice-President Transportation, Canadian Pacific Railway Company
J. R. Milloy Calgary, Alberta, Canada		Group Vice-President, Marketing & Yield		Group Vice-President, Marketing & Yield, Canadian Pacific Railway Company; Vice-President, Revenue & Yield Management, Canadian Pacific Railway Company; Vice-President Marketing & Yield, Canadian Pacific Railway Company; Assistant Vice-President Yield Management, Canadian Pacific Railway Company
R. A. Shields Calgary, Alberta, Canada		Group Vice-President, Human Resources and Industrial Relations		Group Vice-President, Human Resources and Industrial Relations, Canadian Pacific Railway Limited and Canadian Pacific Railway Company; Vice-President, Human Resources and Industrial Relations, Canadian Pacific Railway Limited and Canadian Pacific Railway Company
M. G. Allison Calgary, Alberta, Canada		Vice-President and Treasurer		Vice-President and Treasurer, Canadian Pacific Railway Company and Canadian Pacific Railway Limited; Vice-President and Treasurer, Suncor Energy, Inc.; Vice-President Process Integration, Suncor Energy Inc.; Vice-President Business Services — Natural Gas & Renewable Energy — Suncor Energy Inc.
D. B. Campbell Calgary, Alberta, Canada		Vice-President, Finance		Vice-President, Finance, Canadian Pacific Railway Limited and Canadian Pacific Railway Company; Vice-President, Corporate Planning, Canadian Pacific Railway Limited and Canadian Pacific Railway Company; Vice-President Business Planning and Development, Canadian Pacific Railway Company
B. W. Grassby Calgary, Alberta, Canada		Vice-President and Comptroller		Vice-President and Comptroller, Canadian Pacific Railway Company and Canadian Pacific Railway Limited; Acting Chief Financial Officer and Vice-President and Comptroller, Canadian Pacific Railway Company and Canadian Pacific Railway Limited; Vice-President and Comptroller, Canadian Pacific Railway Company and Canadian Pacific Railway Limited
P. A. Guthrie, Q.C. Municipal District of Rockyview, Alberta, Canada		Vice-President, Law		Vice-President, Law, Canadian Pacific Railway Company and Canadian Pacific Railway Limited; Assistant Vice-President Legal Services, Canadian Pacific Railway Company

SECTION 8: DIRECTORS AND OFFICERS

Name and municipality of residence		Position held		Principal occupation within the
				preceding five years
K. L. Fleming Calgary, Alberta, Canada		Corporate Secretary		Corporate Secretary, Canadian Pacific Railway Limited and Canadian Pacific Railway Company; Associate Corporate Secretary, Canadian Pacific Railway Limited and Canadian Pacific Railway Company; Legal Counsel Labour & Employment Coordinator, Canadian Pacific Railway Company; Labour Coordinator, Canadian Pacific Railway Company

8.4 Shareholdings of Directors and Officers

As at December 31, 2009, the directors and senior officers of CPRL owned or controlled a total of 131,320 shares representing approx. 0.08% of the outstanding shares at that date (168,470,143).

SECTION 9: LEGAL PROCEEDINGS

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.

9.1 Stoney Tribal Council v. Canada, EnCana and CP

On February 26, 1999, a Statement of Claim was issued in the Court of Queen’s Bench of Alberta, Judicial Centre of Calgary. The Stoney Tribal Council filed an action against CP and others in the amount of $150 million for alleged trespass and unlawful removal of oil and gas from reserve lands. No steps have been taken in this action since pleadings were filed and we believe no provision is required for this lawsuit.

SECTION 10: TRANSFER AGENTS AND REGISTRARS

10.1 Transfer Agent

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

Computershare Trust Company NA, Denver, Colorado, serves as co-transfer agent and co-registrar for CP’s Common Shares in the United States.

Requests for information should be directed to:

Computershare Trust Company of Canada
100 University Avenue, 9^th Floor
Toronto, Ontario Canada
M5J 2Y1

SECTION 11: INTERESTS OF EXPERTS

The Company’s independent auditors are PricewaterhouseCoopers LLP, Chartered Accountants. PricewaterhouseCoopers LLP has issued an independent auditors’ report dated February 25, 2010, in respect of the Company’s consolidated financial statements, as at December 31, 2009 and 2008 and for each of the years in the three year period ended December 31, 2009. They have also prepared an audit report on the effectiveness of internal control over financial reporting, at December 31, 2009. PricewaterhouseCoopers LLP has advised that they are independent with respect to CP within the meaning of the Rules of Professional Conduct of the Institute of Chartered Accountants of Alberta and the rules of the US Securities and Exchange Commission.

SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE

12.1 Composition of the Audit, Finance and Risk Management Committee and Relevant Education and Experience

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

Krystyna T. Hoeg - Ms. Hoeg is the former President and Chief Executive Officer of Corby Distilleries Limited, a marketer and seller of spirits and wine, a position that she held from October 1996 to February 2007. She is a director of Imperial Oil Limited, Sun Life Financial Inc., Shoppers Drug Mart Corporation, Cineplex Galaxy Income Fund, Ganong Bros. Limited and Samuel, Son & Co., Limited. She is also on the Board of the Toronto East General Hospital. Ms. Hoeg is a Chartered Accountant (1982) and holds a B.Sc. from McMaster University, and a B.Com. and an M.Sc. from the University of Windsor.

Richard C. Kelly - Mr. Kelly is Chairman and Chief Executive Officer of Xcel Energy Inc., a utility supplier of electric power and natural gas service in eight Western and Midwestern States. He has held that position since September 2009. From December 2005 to September 2009 he was Chairman of the Board, President and Chief Executive Officer, from June to mid-December 2005 he served as President and Chief Executive Officer, and previous to that he served as Chief Financial Officer. Mr. Kelly is Vice-Chairman of Edison Electric Institute, Chairman of the Board of Trustees of the Science Museum of Minnesota and a Board member of the Capital City Partnership, the Electric Power Research Institute, the Nuclear Energy Institute Regis University and director on the Denver Metro Chamber of Commerce. Mr. Kelly earned both an M.B.A. and a bachelor’s degree in accounting from Regis University.

John P. Manley - Mr. Manley is President and Chief Executive Officer of the Canadian Council of Chief Executives. He has held that position since January 2010. From May 2004 to December 2009 he was counsel at the law firm of McCarthy Tétrault LLP. He is a director of Canadian Imperial Bank of Commerce, CAE Inc. and a director and Board Chair of Optosecurity Inc. (a private company). In addition, Mr. Manley serves on the Boards of the University of Waterloo, MaRS Discovery District, National Arts Center Foundation, CARE Canada, The Conference Board of Canada and the Institute for Research on Public Policy. In October 2007 he was appointed by the Prime Minister to Chair the Independent Panel on Canada’s role in Afghanistan. Mr. Manley was previously the Member of Parliament for Ottawa South from November 1988 to June 2004. As a Member of Parliament, Mr. Manley also held various positions in the Canadian Federal Government, including Deputy Prime Minister of Canada from January 2002 to December 2003, Minister of Finance from June 2002 to December 2003, Minister of Foreign Affairs from October 2000 to January 2002 and Minister of Industry prior thereto. He graduated from Carleton University with a B.A. and from the University of Ottawa with an LL.B. He was granted the designation C.Dir (Chartered Director) by McMaster University in February 2006.

Roger Phillips - 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 Toronto Dominion Bank, Imperial Oil Limited and Cliffs Natural Resources. 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.

David W. Raisbeck - Mr. Raisbeck is the Retired Vice-Chairman of Cargill Inc., a position he held from 1999 to 2009. Mr. Raisbeck joined Cargill in 1971 and held various positions in the Company including President of Cargill’s Trading Sector, 1993 to 1995; Executive Vice-President, 1995 to 1999 and Executive Supervisor of Human Resources, 1996 to 1999. He retired from Cargill management in 2008 and from Cargill’s board of directors in 2009. Mr. Raisbeck is Chairman of the Board of CarVal Asset Management and sits on the board of directors of Cardinal Health, Eastman Chemical, and the Greater Minneapolis YMCA (Honorary). He is a governor of the Iowa State University Foundation and is a member of the Dean’s Advisory Council for the school of business at Iowa State University. He received a bachelor’s degree in industrial administration from Iowa State University and completed the executive MBA program at the University of Southern California.

Michael W. Wright (Chair) - 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 Honeywell International, Inc., S.C. Johnson & Son, Inc. and Cargill Inc. He is a Trustee Emeritus of the University of Minnesota Foundation 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).

SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE

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

12.2 Pre-Approval of Policies and Procedures

The Committee has adopted a written policy governing the pre-approval of audit and non-audit services to be provided to CP 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. 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 Chief Internal Auditor monitors compliance with this policy.

12.3 Audit, Finance and Risk Management Committee Charter

The term “Corporation” herein shall refer to each of Canadian Pacific Railway Limited (“CPRL”) and Canadian Pacific Railway Company (“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.

A.		Committee and Procedures
1.		Purposes

The purposes of the Audit, Finance and Risk Management Committee (the “Committee”) of the Board of Directors of the Corporation are to fulfill applicable public company audit committee legal obligations and to assist the Board of Directors in fulfilling its oversight responsibilities in relation to the disclosure of financial statements and information derived from financial statements, and in relation to risk management matters including:

	•		the review of the annual and interim financial statements of the Corporation;
	•		the integrity and quality of the Corporation’s financial reporting and systems of internal control, and risk management;
	•		the Corporation’s compliance with legal and regulatory requirements;
	•		the qualifications, independence, engagement, compensation and performance of the Corporation’s external auditors; and
	•		the performance of the Corporation’s internal audit function;

and to prepare, if required, an audit committee report for inclusion in the Corporation’s annual management proxy circular, in accordance with applicable rules and regulations.

The Corporation’s external auditors shall report directly to the Committee.

2.

Composition of Committee

The members of the Committee of each of CPRL and CPRC shall be identical and shall be Directors of CPRL and CPRC, respectively. The Committee shall consist of not less than three and not more than six Directors, none of whom is either an officer or employee of the Corporation or any of its subsidiaries. Members of the Committee shall meet applicable requirements and guidelines for audit committee service, including requirements and guidelines with respect to being independent and unrelated to the Corporation and to having accounting or related financial management expertise and financial literacy, set forth in applicable securities laws or the rules of any stock exchange on which the Corporation’s securities are listed for trading. No director who serves on the audit committee of more than two public companies other than the Corporation shall be eligible to serve as a member of the Committee, unless the Board of Directors has determined that such simultaneous service would not impair the ability of such member to effectively serve on the Committee. Determinations as to whether a particular Director satisfies the requirements for membership on the Committee shall be affirmatively made by the full Board.

SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE

3.

Appointment of Committee Members

Members of the Committee shall be appointed from time to time by the Board and shall hold office at the pleasure of the Board. Where a vacancy occurs at any time in the membership of the Committee, it may be filled by the Board. The Board shall fill a vacancy whenever necessary to maintain a Committee membership of at least three Directors.

4.

Committee Chair

The Board shall appoint a Chair for the Committee from among the Committee members.

5.

Absence of Committee Chair

If the Chair of the Committee is not present at any meeting of the Committee, one of the other members of the Committee who is present at the meeting shall be chosen by the Committee to preside at the meeting.

6.

Secretary of Committee

The Committee shall appoint a Secretary who need not be a director of the Corporation.

7.

Meetings

The Committee shall meet at regularly scheduled meetings at least once every quarter and shall meet at such other times during each year as it deems appropriate. In addition, the Chair of the Committee may call a special meeting of the Committee at any time.

8.

Quorum

Three members of the Committee shall constitute a quorum.

9.

Notice of Meetings

Notice of the time and place of every meeting shall be given in writing by any means of transmitted or recorded communication, including facsimile, telex, telegram or other electronic means that produces a written copy, to each member of the Committee at least 24 hours prior to the time fixed for such meeting; provided however, that a member may in any manner waive a notice of a meeting. Attendance of a member at a meeting constitutes a waiver of notice of the meeting, except where a member attends a meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully called.

10.

Attendance of Others at Meetings

At the invitation of the Chair of the Committee, other individuals who are not members of the Committee may attend any meeting of the Committee.

11.

Procedure, Records and Reporting

Subject to any statute or the articles and by-laws of the Corporation, the Committee shall fix its own procedures at meetings, keep records of its proceedings and report to the Board when the Committee may deem appropriate (but not later than the next meeting of the Board). The minutes of its meetings shall be tabled at the next meeting of the Board.

12.

Delegation

The Committee may delegate from time to time to any person or committee of persons any of the Committee’s responsibilities that lawfully may be delegated.

13.

Report to Shareholders

The Committee shall prepare a report to shareholders or others concerning the Committee’s activities in the discharge of its responsibilities, when and as required by applicable laws or regulations.

14.

Guidelines to Exercise of Responsibilities

The Board recognizes that meeting the responsibilities of the Committee in a dynamic business environment requires a degree of flexibility. Accordingly, the procedures outlined in these Terms of Reference are meant to serve as guidelines rather than inflexible rules, and the Committee may adopt such different or additional procedures as it deems necessary from time to time.

SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE

15.

Use of Outside Legal, Accounting or Other Advisors; Appropriate Funding

The Committee may retain, at its discretion, outside legal, accounting or other advisors, at the expense of the Corporation, to obtain advice and assistance in respect of any matters relating to its duties, responsibilities and powers as provided for or imposed by these Terms of Reference or otherwise by law.

The Committee shall be provided by the Corporation with appropriate funding, as determined by the Committee, for payment of:

	(i)		compensation of any outside advisers as contemplated by the immediately preceding paragraph;
	(ii)		compensation of any independent auditor engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Corporation; or
	(iii)		ordinary administrative expenses that are necessary or appropriate in carrying out the Committee’s duties.

All outside legal, accounting or other advisors retained to assist the Committee shall be accountable ultimately to the Committee.

16.

Remuneration of Committee Members

No member of the Committee shall receive from the Corporation or any of its affiliates any compensation other than the fees to which he or she is entitled as a Director of the Corporation or a member of a committee of the Board. Such fees may be paid in cash and/or shares, options or other in-kind consideration ordinarily available to Directors.

B. Mandate

17.		The Committee’s role is one of oversight. Management is responsible for preparing the interim and annual financial statements of the Corporation and for maintaining a system of risk assessment and internal controls to provide reasonable assurance that assets are safeguarded and that transactions are authorized, recorded and reported properly, for maintaining disclosure controls and procedures to ensure that it is informed on a timely basis of material developments and the Corporation complies with its public disclosure obligations, and for ensuring compliance by the Corporation with legal and regulatory requirements. The external auditors are responsible for auditing the Corporation’s financial statements. In carrying out its oversight responsibilities, the Committee does not provide any professional certification or special assurance as to the Corporation’s financial statements or the external auditors’ work.
		The Committee shall:
		Audit Matters

External Auditors’ Report on Annual Audit

a)

obtain and review annually prior to the completion of the external auditors’ annual audit of the year-end financial statements a report from the external auditors describing:

	(i)		all critical accounting policies and practices to be used;
	(ii)		all alternative treatments of financial information within generally accepted accounting principles that have been discussed with management, the ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the external auditors; and
	(iii)		other material written communications between the external auditors and management, such as any management letter or schedule of unadjusted differences;

Management’s and Internal Auditors’ Reports on External Audit Issues

b)

review any reports on the above or similar topics prepared by management or the internal auditors and discuss with the external auditors any material issues raised in such reports;

Annual Financial Reporting Documents and External Auditors’ Report

c)

meet to review with management, the internal auditors and the external auditors the Corporation’s annual financial statements, the report of the external auditors thereon, the related Management’s Discussion and Analysis, and the information derived from the financial statements, as contained in the Annual Information Form and the Annual Report. Such review will include obtaining assurance from the external auditors that the audit was conducted in a manner consistent with applicable law and will include a review of:

(i)

all major issues regarding accounting principles and financial statement presentations, including any significant changes in the Corporation’s selection or application of accounting policies or principles;

SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE

	(ii)		all significant financial reporting issues and judgments made in connection with the preparation of the financial statements, including the effects on the financial statements of alternative methods within generally accepted accounting principles;
	(iii)		the effect of regulatory and accounting issues, as well as off-balance sheet structures, on the financial statements;
	(iv)		all major issues as to the adequacy of the Corporation’s internal controls and any special steps adopted in light of material control deficiencies; and
	(v)		the external auditors’ judgment about the quality, and not just the acceptability, of the accounting principles applied in the Corporation’s financial reporting;

d)

following such review with management and the external auditors, recommend to the Board of Directors whether to approve the audited annual financial statements of the Corporation and the related Management’s Discussion and Analysis, and report to the Board on the review by the Committee of the information derived from the financial statements contained in the Annual Information Form and Annual Report;

Interim Financial Statements and MD&A

e)

review with management, the internal auditors and the external auditors the Corporation’s interim financial statements and its interim Management’s Discussion and Analysis, and if thought fit, approve the interim financial statements and interim Management’s Discussion and Analysis and the public release thereof by management;

Earnings Releases, Earnings Guidance

f)

review and discuss earnings press releases, including the use of “pro forma” or “adjusted” information determined other than in accordance with generally accepted accounting principles, and the disclosure by the Corporation of earnings guidance and other financial information to the public including analysts and rating agencies, it being understood that such discussions may, in the discretion of the Committee, be done generally (i.e., by discussing the types of information to be disclosed and the type of presentation to be made) and that the Committee need not discuss in advance each earnings release or each instance in which the Corporation discloses earnings guidance or other financial information; and be satisfied that adequate procedures are in place for the review of such public disclosures and periodically assess the adequacy of those procedures;

Material Litigation, Tax Assessments, Etc.

g)

review with management, the external auditors and, if necessary, legal counsel all legal and regulatory matters and litigation, claims or contingencies, including tax assessments, that could have a material effect upon the financial position of the Corporation, and the manner in which these matters may be, or have been, disclosed in the financial statements; and obtain reports from management and review with the Corporation’s chief legal officer, or appropriate delegates, the Corporation’s compliance with legal and regulatory requirements;

Oversight of External Auditors

h)

subject to applicable law relating to the appointment and removal of the external auditors, be directly responsible for the appointment, retention, termination, compensation and oversight of the external auditors; and be responsible for the resolution of disagreements between management and the external auditors regarding financial reporting;

Rotation of External Auditors’ Audit Partners

i)

review and evaluate the lead audit partner of the external auditors and assure the regular rotation of the lead audit partner and the audit partner responsible for reviewing the audit and other audit partners, as required by applicable law; and consider whether there should be a regular rotation of the external audit firm itself;

External Auditors’ Internal Quality Control

j)

obtain and review, at least annually, and discuss with the external auditors a report by the external auditors describing the external auditors’ internal quality-control procedures, any material issues raised by the most recent internal quality-control review, or peer review, of the external auditors, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the external auditors, and any steps taken to deal with any such issues;

SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE

External Auditors’ Independence

k)

review and discuss at least annually with the external auditors all relationships that the external auditors and their affiliates have with the Corporation and its affiliates in order to assess the external auditors’ independence, including, without limitation:

	(i)		obtaining and reviewing, at least annually, a formal written statement from the external auditors delineating all relationships that in the external auditors’ professional judgment may reasonably be thought to bear on the independence of the external auditors with respect to the Corporation,
	(ii)		discussing with the external auditors any disclosed relationships or services that may affect the objectivity and independence of the external auditors, and
	(iii)		recommending that the Board take appropriate action in response to the external auditors’ report to satisfy itself as to the external auditors’ independence;

Policies Regarding Hiring of External Auditors’ Employees and Former Employees

l)

set clear policies for the hiring by the Corporation of partners, employees and former partners and employees of the external auditors;

Pre-Approval of Audit and Non-Audit Services Provided by External Auditors

	m)		be solely responsible for the pre-approval of all audit and non-audit services to be provided to the Corporation and its subsidiary entities by the external auditors (subject to any prohibitions provided in applicable law), and of the fees paid for these services; provided however, that the Committee may delegate to an independent member or members of the Committee authority to pre-approve such non-audit services, and such member(s) shall report to the Committee at its next meeting following the granting any pre-approvals granted pursuant to such delegated authority;
	n)		review the external auditors’ annual audit plan (including scope, staffing, reliance on internal controls and audit approach);
	o)		review the external auditors’ engagement letter;

Oversight of Internal Audit

p)

oversee the internal audit function by reviewing senior management action with respect to the appointment or dismissal of the Chief Internal Auditor; afford the Chief Internal Auditor unrestricted access to the Committee; review the charter, activities, organizational structure, and the skills and experience of the Internal Audit Department; discuss with management and the external auditors the competence, performance and cooperation of the internal auditors; and discuss with management the compensation of the internal auditors;

q)

review and consider, as appropriate, any significant reports and recommendations issued by the Corporation or by any external party relating to internal audit issues, together with management’s response thereto;

Internal Controls and Financial Reporting Processes

	r)		review with management, the internal auditors and the external auditors, the Corporation’s financial reporting processes and its internal controls;
	s)		review with the internal auditors the adequacy of internal controls and procedures related to any corporate transactions in which directors or officers of the Corporation have a personal interest, including the expense accounts of officers of the Corporation at the level of Vice-President and above and officers’ use of corporate assets, and consider the results of any reviews thereof by the internal or external auditors;

Complaints Processes

t)

establish procedures for:

	(i)		the receipt, retention and treatment of complaints received by the Corporation regarding accounting, internal accounting controls or auditing matters, and
	(ii)		the confidential, anonymous submission by employees of the Corporation of concerns regarding questionable accounting or auditing matters,

and review periodically with management and the internal auditors these procedures and any significant complaints received;

SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE

Separate Meetings with External Auditors, Internal Audit, Management

u)

meet separately with management, the external auditors and the internal auditors periodically to discuss matters of mutual interest, including any audit problems or difficulties and management’s response thereto, the responsibilities, budget and staffing of the Internal Audit Department and any matter they recommend bringing to the attention of the full Board;

Finance

	v)		review all major financings, including financial statement information contained in related prospectuses, information circulars, etc., of the Corporation and its subsidiaries and annually review the Corporation’s financing plans and strategies;
	w)		review management’s plans with respect to Treasury operations, including such items as financial derivatives and hedging activities;

Risk Management

x)

discuss risk assessment and risk management policies and processes to be implemented for the Corporation, review with management and the Corporation’s internal auditors the effectiveness and efficiency of such policies and processes and their compliance with other relevant policies of the Corporation, and make recommendations to the Board with respect to any outcomes, findings and issues arising in connection therewith;

y)

review management’s program to obtain appropriate insurance to mitigate risks;

Terms of Reference and Performance Evaluation of Committee

z)

review and reassess the adequacy of these Terms of Reference at least annually, and otherwise as it deems appropriate, and recommend changes to the Board. The Committee shall also undertake an annual evaluation of the Committee’s performance.

Other

	aa)		perform such other activities, consistent with these Terms of Reference, the Corporation’s articles and by-laws and governing law, as the Committee or the Board deems appropriate.
	bb)		report regularly to the Board of Directors on the activities of the Committee.

12.4 Audit and Non-Audit Fees and Services

Fees payable to PricewaterhouseCoopers LLP for the years ended December 31, 2009, and December 31, 2008, totalled $3,396,200 and $3,195,200, respectively, as detailed in the following table:

		Year ended				Year ended
		December 31, 2009				December 31, 2008
Audit Fees		$	2,176,800			$	2,044,700
Audit-Related Fees		$	794,800			$	808,600
Tax Fees		$	424,600			$	341,900
All Other Fees		$	—			$	—
TOTAL		$	3,396,200			$	3,195,200

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

12.4.1 Audit Fees

Audit fees were for professional services rendered for the audit of CP’s annual financial statements and services provided in connection with statutory and regulatory filings or engagements, including the attestation engagement for the independent auditors’ report on the effectiveness of internal controls over financial reporting.

12.4.2 Audit-Related Fees

Audit-related fees were for attestation and related services reasonably related to the performance of the audit or review of the annual financial statements, but which are not reported under “Audit Fees” above. These services consisted of: the audit or review of financial statements of certain subsidiaries and of various pension and benefits plans of CP; special attestation services as may be required by various government entities; access fees for technical accounting database resources; and

SECTION 12: AUDIT, FINANCE AND RISK MANAGEMENT COMMITTEE

general advice and assistance related to accounting and/or disclosure matters with respect to new and proposed Canadian, US and International accounting standards, securities regulations, and/or laws.

12.4.3 Tax Fees

Tax fees were for professional services related to tax compliance, tax planning and tax advice. These services consisted of: tax compliance including the review of tax returns; assistance with questions regarding corporate tax audits; 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.

12.4.4 All Other Fees

Fees disclosed under this category would be for products and services other than those described under “Audit Fees”, “Audit-Related Fees” and “Tax Fees” above. In both 2009 and 2008, there were no services in this category.

SECTION 13: FORWARD LOOKING INFORMATION

This AIF contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (US) and other relevant securities legislation relating but not limited to expected improvements in operating efficiency and fluidity, the ability of information technology to improve service and provide sophisticated billing options, the benefits of lean process/kaizen principles and the cost of environmental remediation. Forward-looking information typically contains statements with words such as “anticipate”, “believe”, “expect”, “plan” or similar words suggesting future outcomes.

Readers are cautioned to not place undue reliance on forward-looking information because it is possible that actual results will be different from our forward-looking information. In addition, except as required by law, we undertake no obligation to update publicly or otherwise revise any forward-looking information, whether as a result of new information, future events or otherwise.

The forward-looking information in this document involves numerous assumptions, inherent risks and uncertainties, including but not limited to the following factors: the ability to implement cost-cutting and efficiency initiatives, the effectiveness of new information technology and estimates of future costs.

SECTION 14: ADDITIONAL INFORMATION

14.1 Additional Company Information

Additional information about CP is available on SEDAR (System for Electronic Document Analysis and Retrieval) at www.sedar.com in Canada, and on the US Securities and Exchange Commission’s website (EDGAR) at www.sec.gov. The aforementioned information is issued and made available in accordance with legal requirements and is not incorporated by reference into this AIF except as specifically stated.

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 MD&A for the most recently completed financial year.

This information is also available on our website at www.cpr.ca.

 

CHAIRMAN’S MESSAGE TO SHAREHOLDERS

 

Over the last year the Board of Directors was actively engaged in overseeing the strategy of Canadian Pacific Railway during uncertain economic times while continuing to apply and enhance strong corporate governance practices.

 

We have a seasoned and independent Board of Directors who continuously review the strategic direction of CP in order to protect and enhance shareholder value. The successful financial flexibility and cost reduction initiatives undertaken by management leave CP well positioned to be resilient for the future.

 

The Board of Directors is committed to ensuring that we have the right mix of broad and diverse expertise to carry out our responsibilities. During these challenging times, we recognize the importance of sound business judgment, thoughtful analysis, and strong personal integrity in the boardroom. In 2009, we were pleased to welcome our newest director, Mr. David Raisbeck, who is the retired Vice-Chairman of Cargill Inc. His knowledge of the global commodity products that are central to CP’s business, proven strategic vision, and risk management experience enhance key competencies of the Board.

 

We remain proactive in adopting and applying best practices in corporate governance and were honoured to receive the 2009 Governance Gavel award for Director Disclosure from the Canadian Coalition for Good Governance. We take good governance seriously and are committed to continuously improving clear and comprehensive disclosure. Commencing in 2011, we will be providing shareholders with the opportunity to participate in an advisory vote on executive compensation, also known as “say on pay”.

 

To assist us in fulfilling our role of safeguarding the interests of shareholders, we continue our director education program to continually expand our knowledge of CP and the railway industry. Over the past year, we have received regular reports and presentations on the changing regulatory and business environment. We also engaged in an extensive tour of the rail and port infrastructure located in the lower mainland of British Columbia, Canada.

 

As Chairman, I would like to take this opportunity to extend the Board’s appreciation to Fred Green, his management team, and all employees of CP for their contributions to the success of CP in a challenging year. Everyone at CP remains focused on safe operations while continuing to enhance the stability and strength of the franchise.

 

Sincerely,

 

John E. Cleghorn, O.C., FCA

Chairman of the Board

2009 ANNUAL REPORT		1

CHIEF EXECUTIVE OFFICER’S LETTER TO SHAREHOLDERS

 

2009 was an extraordinary year and Canadian Pacific was equal to the task. While we experienced unprecedented decreases in traffic volumes, we met those challenges with a solid strategy based on five key objectives:

 

 

In uncertain economic times, a strong balance sheet gives CP the flexibility to seize opportunities as they arise. In 2009, we completed a number of large financial transactions that strengthened our balance sheet and improved near term liquidity. These actions included issuing new equity, multiple debt tenders and issuances, and the monetization of non strategic assets. Additionally, we made prepayments in excess of $500 million to our Canadian and US defined benefit pension plans. As we move into 2010, CP is well positioned to manage in the ongoing uncertain economic climate.

 

In 2009, adjusting our variable expenses to match our revenue declines was critical and we successfully reduced operating expenses by 17 percent in line with the decrease in revenue of 18 percent. We stored locomotives and railcars and implemented technology that reduced locomotive fuel costs. We took the unfortunate, but necessary, action of temporarily laying off up to 2,700 employees during the periods of our worst volume decreases.

 

We also made good progress on the longer term goal of lowering our structural costs. We tested and are now running 10,000 foot trains. We consolidated and rationalized certain mechanical repair facilities, and we continue to adjust our management structure.

 

Despite the significant downturn in the economy, we didn’t lose sight of creating and preserving opportunities for growth. In our industry, our investments can have a 10, 20, or 30 year horizon and we must balance near-term pressures with a long-term horizon. The proposed intermodal facilities in Regina, Edmonton, Les Cedres outside Montreal, and the Alberta Industrial Heartland are examples of growth projects that we continued to pursue, albeit in a paced fashion.

 

Our vision remains to be the safest, most fluid railway in North America and in 2009, as we continued to make safety a top priority, we saw a decline in the incident rate of 23 percent.

 

CP continues to recognize the importance of maintaining our partnerships with the more than 1,100 communities through which we operate. In 2009, we celebrated the 100^th Anniversary of the completion of the Spiral Tunnels in the Kicking Horse Pass in partnership with Parks Canada, the town of Field, B.C. and the Burgess Shale Geoscience Foundation. We also marked the 100^th anniversary of the building of the Lethbridge Viaduct. Our Holiday Train visited over 130 communities in six provinces and seven states to raise food, money and awareness for local food banks. This was the 11^th year that CP has taken the Holiday Train across the continent, and despite the tough economic climate, CP recognized that now, more than ever, the people in our communities need this program and we remain committed to it.

 

Canadian Pacific was the official rail services supplier to the Vancouver 2010 Olympic and Paralympic Winter Games which took place very recently. Through CP’s sponsorship 28 employees experienced carrying the Olympic torch, 46 CP volunteers assisted VANOC on-site in many different roles, and we were privileged to host key stakeholders on the Royal Canadian Pacific that was located in Vancouver during the Games. We are proud that our company was a part of this world welcoming event.

 

In summary, 2009, while a very difficult year, has proved to be a turning point for CP. The lessons learned in difficult times will serve us well as we move into 2010 and beyond. With continuing economic uncertainty, CP is firmly focused on managing fixed and variable costs and ensuring we continue to price for value. Maintaining our financial flexibility and focusing on safe and efficient operations will position us well for the future and the inevitable upturn in the economy. Though we will continue to see change and improvement in our business, delivering a consistent, quality service to our customers remains a cornerstone of the CP franchise.

 

Sincerely,

 

Fred J. Green

President and Chief Executive Officer

2		2009 ANNUAL REPORT

 

MANAGEMENT’S DISCUSSION AND ANALYSIS
For the year ended December 31, 2009

 

 

TABLE OF CONTENTS

 

2009 ANNUAL REPORT		3