Canadian Pacific Railway Limited (CP) welcomes the opportunity to provide input into your review of business taxation within the Province.

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1 June 4, 2012 Expert Panel on Business Taxation Room Government Street Victoria BC V8W 9V8 Sarah Morgan-Silvester, Panel Chair Lindsay Hall, Panel member Laura Jones, Panel member Elio Luongo, Panel member Fiona Macfarlane, Panel member Grace Wong, Panel member Dale Wall, Panel adjunct member Dear Panelists: Canadian Pacific Railway Limited (CP) welcomes the opportunity to provide input into your review of business taxation within the Province. CP, through its subsidiaries, operates a transcontinental railway in Canada and the United States and provides logistics and supply chain expertise. CP provides rail, transload and intermodal transportation services over a network of approximately 14,800 miles and through more than 40 classification yards and 14 intermodal facilities. We serve every major center in Canada from Montreal, Quebec, to Vancouver, British Columbia, and the U.S. Northeast and Midwest regions including Chicago, Minneapolis, Detroit, New York, Philadelphia and Kansas City. Agreements with other carriers extend our market reach east of Montreal in Canada, throughout the U.S. and into Mexico.

2 CP transports bulk commodities, merchandise freight and intermodal traffic. Bulk commodities include grain, coal, sulphur and fertilizers. Merchandise freight consists of finished vehicles and automotive parts, as well as forest, industrial and consumer products. Included in industrial and consumer products is one of our fastest growing markets, energy. Intermodal traffic consists largely of high-value, timesensitive retail goods in overseas containers that are transported by train, ship and truck, or in domestic containers and trailers that are moved by train and truck. In 2011, CP earned $5.1 billion in freight revenues and moved 2.6 million carloads. Forty per cent of everything moved by the company travelled through Port Metro Vancouver and the Vancouver Gateway. Canadian Pacific in British Columbia: CP s role in the foundation of the Province is well known, and we continue to fulfill that role today. In 2011, CP s total economic presence in British Columbia was $477 million. The company s economic presence included purchased service ($199.9 million), payroll ($174.1 million), capital investment ($57.6 million), taxation ($44 million 2010), and community investment ($1.3 million). Economic Presence in British Columbia ($millions) Purchased Services Community Investment 1.3 Capital Investment 57.6 Economic Presence Taxation (2010) 44 Payroll The company employed 2,815 British Columbians with average salary of $61,862, well above the provincial and national averages. Significantly, our employees are distributed across the southern half of the province, with major operational crew bases in Cranbrook, Golden, Revelstoke, Kamloops, North Bend (Hope) and Metro Vancouver

3 2011 CP Employment in BC (Average Salary: $61,862) General Transportation Mechanical Employment Engineering Operations Beyond direct employment, CP s franchise also directly drives investment and jobs in both urban and rural communities across the southern half of the Province. Our Canadian metallurgical coal business is almost entirely generated from Teck Resources Limited s (Teck) five mines in the Elk Valley region of southeastern British Columbia. Most of the volume is moved to Port Metro Vancouver for export throughout the world. Our service is based on highly efficient unit trains in continuous motion through the mine-port transportation cycle. In 2011, CP and Teck began shipping coal under an innovative 10-year agreement, through a collaborative approach to the coal supply chain and investments by CP that will increase our coal handling capacity to support Teck s volume growth. CP is in the second year of a three year $100 million capital program to upgrade our world-class metallurgical coal supply chain. CP has invested, and continues to invest, in building a truly world-class coal transportation model

4 Strategic Context The Pacific Gateway: The Province benefits directly from the Gateway, and has undertaken a series of supportive policy measures to encourage Gateway trade and employment growth. More than $200 million in trade passes through Port Metro Vancouver every day. It worth noting that much of the infrastructure required for efficient and reliable trade is private infrastructure, owned, financed and operated by private companies, including CP. As the Pacific Gateway Transportation Strategy 2012 to 2020 notes, British Columbia s rich supply of natural resources has fuelled the provincial economy for over 150 years. Today, with demand for North American products on the rise in the fast-growing nations of the Asia Pacific, British Columbia attracts new investment, creates jobs and generates revenues thanks to its reliable, efficient, and cost-effective transportation network. The strategy recognizes that private-sector investment will be a key driver of the many projects necessary to drive the strategy forward. Indeed, some recent steps have been taken through Budget 2012, such as a permanent cap on Port property taxes and the elimination of excise taxes on jet fuel used by commercial airlines in international flights. These measures were both priorities for the Pacific Gateway Alliance. CP supports both measures, which build confidence and ensure a competitive business environment. CP believes there is even more that can be done through fiscal measures to help province achieve the goals of the Pacific Gateway Transportation Strategy. We are particularly interested in opportunities to enhance our competitiveness, which has immediate impacts on our customers and the freight we ship on their behalf

5 CP Taxes Paid: In 2010, CP remitted approximately $44 million in taxes to British Columbia (2011 figures amounts will be published in July 2012). Of those taxes, fuel and property taxes made up three quarters of all taxes paid CP Taxation ($millions) Other Sales, $5.1, 12% Payroll, $6.3, 14% Fuel, $17.9, 41% Property, $14.4, 33% The Carbon Tax: Among the taxes paid, the Carbon Tax is unique to British Columbia. The Carbon Tax has not been emulated in other jurisdictions, making it particularly anti-competitive. The irony is that freight rail is by far the most efficient means to move goods long haul. A single CP train takes as many as 280 trucks off tax-payer funded roads, highways and infrastructure equivalent to 1,100 cars. The Association of American Railroads estimates a single freight train can move one ton of freight an average of 457 miles on a single gallon of diesel fuel. Given the unique nature of the Carbon Tax, it is also worth noting that railways emit just 3.2% of the total greenhouse gas emissions from transportation in Canada - we are part of the solution to climate change. CP has also taken delivery of almost 300 new locomotives in the past five years. These locomotives produce 60 per cent fewer smog pollutants and are 20 per cent more efficient than earlier models. While the application of the Carbon Tax on railways appears neither consistent with the competitive aims of the Pacific Gateway Transportation Strategy, nor government s earlier goals on climate change, its cost continues to be passed directly to our customers, increasing their costs versus other jurisdiction on the West Coast of North America

6 Property Taxes: Railroads in British Columbia are assessed property taxes in a couple of different ways. Rail corridors, defined as the right of way connecting two points, are assessed Class 2, Utilities. Train Yards, defined as fixed locations where rail trains are assembled, marshaled and where crew embark and disembark trains, are assessed Class 6, Industrial Other. In the 1990s, railroads owning property in British Columbia successfully negotiated a reduction in property taxes with the Province. Key regulatory measures include a capping of Class 2 tax rates and the exclusion of railroad-owned and maintained bridges from our assessments. Despite these measures, railroad property taxes continue to be relatively higher in BC than in any other province. The company paid approximately $14 million in property taxes in the southern half of the Province where its primary operations are located in At $14 million, BC property taxes represent the combined property taxes paid to Manitoba and Saskatchewan, and double the property taxes paid in Alberta. CP Property Tax payment (2011 actual ($ millions)) Manitoba Saskatchewan Alberta CP Property Tax payment (2011 actual ($ millions)) British Columbia Through the Pacific Gateway Transportation Strategy, the province has demonstrated a willingness to improve the competitive environment for property taxes. The perpetual extension of the Port Property Tax cap is a significant competitive indemnity, which provides long-term stability for the land intensive marine terminals and wharves which handle Canada s balance of trade. It is a measure which CP supports. Owing to the strategic nature of transportation to the provincial economy, CP believes that the Property Taxes for railways should be reduced to be more competitive with other provinces and, at a minimum, certainty and stability of legislated property tax measures such as the Port Property Tax cap should be extended to all Gateway-related industries

7 Such initiatives would be completely consistent with the Pacific Gateway Transportation Strategy and provide greater confidence for private industry contemplating the multi-billion dollar investments called for in the strategy. HST Reversion to the GST/PST: When the Province announced its plan to harmonize sales taxes in 2009, CP took a look at the implications for the company, our employees and our customers. We concluded the HST provided significant savings to the company, money that we would otherwise spend paying, collecting, remitting and auditing our compliance with two duplicate taxes. CP was a vocal supporter of the HST. Our position was shared by the majority of BC businesses, who collectively estimated an annual savings of more than $150 million in compliance costs. As a result of the HST defeat in last fall s referendum, we estimate the reversion to the duplicate GST/HST will cost the company between $8 and $10 million per year. This reduces the ability of the Company to re-invest in track and infrastructure to support growth. The return of the PST, however, does present provincial policy makers with an opportunity to encourage investment in strategically important industries, such as transportation. The Pacific Gateway Transportation Strategy estimates a staggering $22 billion worth of infrastructure spending has been committed to since 2005 in British Columbia. To date, more than half that amount has been spent, with an additional $10 billion required to capture anticipated growth. CP and its primary competitor are together investing more than $700 million in 2012 track, rolling stock and technology to increase capacity and improve efficiency. This forms part of both railroad s plans to invest over $2.8 billion by 2015 for capacity improvements as part of their multiyear strategies to enable growth. CP believes a PST exemption for material purchased to expand capacity, build for growth or renew infrastructure would not only compensate for the loss of competitive advantage with the PST, but would actually turn a drag on efficiency into a significant competitive advantage. CP has already committed to spending more than $90 million on capital expansion in the Province by A PST exemption rewarding additional investment could ease investment decisions still pending. Recommendations and Conclusion: CP welcomed the Panel s appointment in January, and Minister Falcon s recognition that a competitive business taxation environment is critical to achieving the Province s strategic goals. CP is pleased to provide three recommendations to the Panel: 1. The panel finds the application of the Carbon Tax on railways operating in the Province is inconsistent with the competitive tax environment of neighboring jurisdictions and misaligned with environmental goals

8 2. The panel finds property tax is uncompetitive for railways in the province and seeks to find mechanisms to make it more competitive. Additionally the panel finds that legislated property tax measures for all Gateway related industries, including railways, could provide more certainty and stability. Existing regulatory measures, while currently effective, could be made more durable. 3. The panel finds a PST exemption for material purchased in the province to expand capacity, build for growth or renew infrastructure would immediately increase investment and turn the PST into a competitive advantage over neighboring jurisdictions. CP has tried to align these recommendations with goals of the Pacific Gateway Transportation Strategy, which we believe is well aligned with the aims of the Panel. Should you have any questions, require further information, or wish to review the information provided in additional detail, please contact Mike LoVecchio, Director Government Affairs at or mike_lovecchio@cpr.ca. Thank you for the opportunity to make this submission, we look forward to your recommendations. Sincerely, Jason Copping General Manager, Government Affairs and Gateways cc Hon. Kevin Falcon, Deputy Premier and Minister of Finance Hon. Blair Lekstrom, Minister of Transportation and Infrastructure Business Council of British Columbia British Columbia Chamber of Commerce Vancouver Board of Trade Greater Vancouver Gateway Council Railway Association of Canada CN - 8 -