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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INDEX TO MANAGEMENT'S DISCUSSION AND ANALYSIS

Page

Executive Summary 43

Performance Indicators 44

Results of Operations 47

Impact of Foreign Exchange on Earnings 50

Impact of Fuel Price on Earnings 51

Impact of Share Price on Earnings 52

Operating Revenues 53

Operating Expenses 59

Other Income Statement Items 62

Liquidity and Capital Resources 63

Share Capital 69

Non-GAAP Measures 69

Critical Accounting Estimates 79

Forward-Looking Statements 83

43 CP 2021 ANNUAL REPORT

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to enhance a reader’s understanding of the Company’s results of operations and financial condition. The MD&A is provided as a supplement to, and should be read in conjunction with the Company’s Consolidated Financial Statements and the related notes in Item 8. Financial Statements and Supplementary Data, and other information in this annual report. Except where otherwise indicated, all financial information reflected herein is expressed in Canadian dollars.

For purposes of this report, all references herein to “CP”, “the Company”, “we”, “our” and “us” 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.

Executive Summary

2021 Results

•Financial performance– In 2021, CP reported Diluted earnings per share ("EPS") of $4.18, a 16% increase from $3.59 in 2020. Adjusted diluted EPS increased by 7% to $3.76 in 2021 from $3.53 in 2020. CP’s commitment to service and operational efficiency produced an Operating ratio of 59.9% and an Adjusted operating ratio of 57.6%. Adjusted diluted EPS and Adjusted operating ratio are defined and reconciled in Non-GAAP Measures and discussed further in Results of Operations of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

•Total revenues– CP’s Total revenues increased by 4% to $7,995 million in 2021 from $7,710 million in 2020, driven primarily by higher freight rates, partially offset by lower volumes as measured by revenue ton-miles ("RTMs").

•Operating performance – Average train weight increased by 3% to 9,967 tons and average train length increased by 3% to 8,200 feet due to improvements in operating plan efficiency, in each case compared to 2020. These metrics are discussed further in Performance Indicators of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following table compares 2021 outlook to actual results:

RTM growth Adjusted diluted EPS(1) Capital expenditures

(1) Adjusted diluted EPS is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The update in RTM growth expectation was based on the impact of severe weather from the drought conditions on Canadian grain and the British Columbia ("B.C.") floods. The update in Adjusted diluted EPS expectation was also based on the impacts of the accelerated timeline of the Kansas City Southern ("KCS") acquisition closing into trust.

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Performance Indicators

The following table lists the key measures of the Company’s operating performance:

% Change

Operations Performance

Average train weight – excluding local traffic (tons) 9,967 9,707 9,129 3 6

Average train length – excluding local traffic (feet) 8,200 7,929 7,388 3 7

Average terminal dwell (hours) 7.2 6.5 6.4 11 2

Average train speed (miles per hour, or "mph") 21.6 22.0 22.2 (2) (1)

Total Employees and Workforce

Safety Indicators

FRA train accidents per million train-miles 1.10 0.96 1.06 15 (9)

Operations Performance

These key measures are used by management as comparisons to historical operating results and in the planning process to facilitate decisions that continue to drive further productivity improvements in the Company's operations. Results of these key measures reflect how effective CP’s management is at controlling costs and executing the Company’s operating plan and strategy. Continued monitoring of these key measures ensures that the Company can take appropriate actions to ensure the delivery of superior service and be able to grow its business at low incremental cost.

A GTM is defined as the movement of one ton of train weight over one mile. GTMs are calculated by multiplying total train weight by the distance the train moved. Total train weight comprises the weight of the freight cars, their contents, and any inactive locomotives. An increase in GTMs indicates additional workload. GTMs for 2021 were 271,921 million, a slight decrease compared with 272,360 million in 2020. This decrease was mainly attributable to lower volumes of Grain and Potash. This decrease was partially offset by increased volumes of Metals, minerals and consumer products, Energy, chemicals and plastics, and Automotive.

GTMs in 2020 were 272,360 million, a 3% decrease compared with 280,724 million in 2019. This decrease was primarily driven by decreased volumes of crude, Coal, and frac sand. This decrease was partially offset by increased volumes of Grain, Potash, and Fertilizers and sulphur.

Train miles are defined as the sum of the distance moved by all trains operated on the network. Train miles provide a measure of the productive utilization of our network. A smaller increase in train miles relative to increases in volumes, as measured by RTMs, and/or workload, as measured by GTMs, indicates improved train productivity. Train miles for 2021 were 29,397 thousands, a decrease of 3% compared with 30,324 thousands in 2020. This decrease reflects the impact of a slight decrease in workload (GTMs), as well as the impact of a 3% increase in average train weights.

Train miles in 2020 were 30,324, an decrease of 8% compared with 32,924 thousands in 2019. This decrease reflects the impact of a 3% decrease in workload (GTMs), as well as a 6% increase in average train weights.

Average train weight is defined as the average gross weight of CP trains, both loaded and empty. This excludes trains in short-haul service, work trains used to move CP’s track equipment and materials, and the haulage of other railways’ trains on CP’s network. An increase in average train weight indicates improved asset utilization and may also be the result of moving heavier commodities. Average train weight of 9,967 tons in 2021 increased by 260 tons, or 3% compared with 9,707 tons in 2020. This increase was a result of improvements in operating plan efficiency and continued improvements

45 CP 2021 ANNUAL REPORT

in bulk train efficiency due to moving longer and heavier Grain and export potash trains. This increase was partially offset by lower volumes of heavier bulk commodities. Improvements for Grain trains were driven by the High Efficiency Product ("HEP") train model, which is an 8,500-foot train model that features the new high-capacity grain hopper cars and increased grain carrying capacity.

Average train weight of 9,707 tons in 2020 increased by 578 tons, or 6% compared with 9,129 tons in 2019. This increase was a result of improvements in operating plan efficiency, continued improvements in operational efficiency due to moving longer and heavier export potash and Grain trains, and improved winter operating conditions in the first quarter of 2020. This increase was partially offset by moving lower volumes of heavier commodities such as Canadian coal and crude. Improvements for Grain trains were driven by the 8,500-foot HEP train model.

Average train length is defined as the average total length of CP trains, both loaded and empty. This includes all cars and locomotives on the train and is calculated as the sum of each car or locomotive's length multiplied by the distance travelled, divided by train miles. This excludes trains in short-haul service, work trains used to move CP's track equipment and materials, and the haulage of other railroads' trains on CP's network. An increase in average train length indicates improved asset utilization. Average train length of 8,200 feet in 2021 increased by 271 feet, or 3%, compared with 7,929 feet in 2020. This increase was a result of improvements in operating plan efficiency and continued improvements in bulk train efficiency due to moving longer Grain and export potash trains. Improvements for Grain trains were driven by the 8,500-foot HEP train model.

Average train length of 7,929 feet in 2020 increased by 541 feet, or 7%, compared with 7,388 feet in 2019. This increase was a result of improvements in operating plan efficiency and continued improvements in operational efficiency due to moving longer Grain and export potash trains. This increase was partially offset by moving lower volumes of commodities such as Canadian coal, which move in longer trains. Improvements for Grain trains were driven by the 8,500-foot HEP train model.

Average terminal dwell is defined as the average time a freight car resides within terminal boundaries expressed in hours. The timing starts with a train arriving at the terminal, a customer releasing the car to the Company, or a car arriving at interchange from another railroad. The timing ends when the train leaves, a customer receives the car from CP, or the freight car is transferred to another railroad. Freight cars are excluded if they are being stored at the terminal or used in track repairs. A decrease in average terminal dwell indicates improved terminal performance resulting in faster cycle times and improved railcar utilization. Average terminal dwell of 7.2 hours in 2021 increased by 11% from 6.5 hours in 2020. This unfavourable increase was a result of aligning the operating plan to demand in order to maintain network efficiencies, as well as the impacts of the B.C. wildfires in the third quarter and B.C. floods in the fourth quarter of 2021. Aligning the operating plan to demand resulted in increased average train weight and average train length.

Average terminal dwell of 6.5 hours in 2020 increased by 2% from 6.4 hours in 2019. This unfavourable increase was a result of aligning the operating plan to demand in order to maintain network efficiencies in the last three quarters of 2020. Aligning the operating plan to demand resulted in increased average train weight, average train length, and increased locomotive productivity.

Average train speed is defined as a measure of the line-haul movement from origin to destination including terminal dwell hours. It is calculated by dividing the total train miles travelled by the total train hours operated. This calculation does not include delay time related to customers or foreign railways and excludes the time and distance travelled by: i) trains used in or around CP’s yards; ii) passenger trains; and iii) trains used for repairing track. An increase in average train speed indicates improved on-time performance resulting in improved asset utilization. Average train speed was 21.6 mph in 2021, a decrease of 2%, from 22.0 mph in 2020. This decrease in speed was driven primarily by harsh winter operating conditions in the first quarter of 2021 as well as the impact of the B.C. wildfires in the third quarter of 2021.

Average train speed in 2020 was 22.0 mph, a decrease of 1%, from 22.2 mph in 2019. This decrease in speed was a result of aligning the operating plan to demand in order to maintain network efficiencies in the last three quarters of 2020, partially offset by improved winter operating conditions in the first quarter of 2020. Aligning the operating plan to demand resulted in increased average train weight, average train length, and increased locomotive productivity.

Locomotive productivity is defined as the daily average GTMs divided by daily average operating horsepower. Operating horsepower excludes units offline, tied up or in storage, or in use on other railways, and includes foreign units online. An increase in locomotive productivity indicates more efficient locomotive utilization and may also be the result of moving heavier commodities. Locomotive productivity was 201 GTMs/OHP in 2021, a decrease of 6 GTMs/OHP, or 3%, compared to 207 GTMs/OHP in 2020. This decrease was primarily due to moving higher volumes of merchandise, which are lighter than bulk commodities, as well the impacts of the B.C. floods in the fourth quarter of 2021.

Locomotive productivity was 207 GTMs/OHP in 2020, an increase of 5 GTMs/OHP, or 2%, compared to 202 GTMs/OHP in 2019. This increase was primarily due to improvements in operating plan efficiency as a result of aligning the operating plan to demand.

Fuel efficiencyis defined as U.S. gallons of locomotive fuel consumed per 1,000 GTMs.Fuel consumed includes gallons from freight, yard and commuter service but excludes fuel used in capital projects and other non-freight activities. An improvement in fuel efficiency indicates operational cost savings and CP's commitment to corporate sustainability through a reduction of greenhouse gas emissions intensity. Fuel efficiency for 2021 was 0.931 U.S. gallons/1,000 GTMs, an improvement of 1% compared to 0.942 U.S. gallons/1,000 GTMs in 2020. This improvement was due to running longer and

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heavier trains as a result of improvements in the operating plan. Fuel efficiency for 2020 was 0.942 U.S. gallons/1,000 GTMs, an improvement of 1% compared to 0.955 U.S. gallons/1,000 GTMs in 2019. This improvement was primarily due to improved winter operating conditions in the first quarter of 2020.

Total Employees and Workforce

An employee is defined as an individual currently engaged in full-time, part-time, or seasonal employment with CP while workforce is defined as total employees plus contractors and consultants. The Company monitors employment and workforce levels in order to efficiently meet service and strategic requirements. The number of employees is a key driver to total compensation and benefits costs.

The average number of total employees for 2021 was 12,337, an increase of 169, or 1%, compared to 12,168 in 2020. This increase was driven by the return to work of employees furloughed in the prior year as a result of the economic downturn caused by COVID-19. The total number of employees as at December 31, 2021 was 11,834, a decrease of 56 compared to 11,890 as at December 31, 2020.

The average number of total employees for 2020 was 12,168, a decrease of 935, or 7%, compared to 13,103 in 2019. This decrease was primarily due to more efficient resource planning, including furloughs associated with the economic downturn caused by COVID-19, partially offset by the addition of Central Maine & Quebec Railway U.S. Inc. employees. The total number of employees as at December 31, 2020 was 11,890, a decrease of 804, or 6%, compared to 12,694 as at December 31, 2019, due to reduced workload as measured in GTMs and more efficient resource planning.

The total workforce as at December 31, 2021 was 11,872, a decrease of 32, compared to 11,904 as at December 31, 2020.

The total workforce as at December 31, 2020 was 11,904, a decrease of 828, or 7%, compared to 12,732 as at December 31, 2019, due to more efficient resource planning.

Safety Indicators

Safety is a key priority and core strategy for CP’s management, employees, and Board of Directors. Personal injuries and train accidents are indicators of the effectiveness of the Company's safety systems, and are used by management to evaluate and, as necessary, alter the Company's safety systems, procedures, and protocols. Each measure follows U.S Federal Railroad Administration ("FRA") reporting guidelines, which can result in restatement after initial publication to reflect new information available within specified periods stipulated by the FRA but that exceed the Company's financial reporting timeline.

The FRA personal injuries per 200,000 employee-hours frequency is the number of personal injuries, multiplied by 200,000 and divided by total employee hours. Personal injuries are defined as injuries that require employees to lose time away from work, modify their normal duties or obtain medical treatment beyond minor first aid. FRA employee-hours are the total hours worked, excluding vacation and sick time, by all employees, excluding contractors. The FRA personal injuries per 200,000 employee-hours frequency for CP was 0.92 in 2021, compared with 1.11 in 2020 and 1.42 in 2019.

TheFRA train accidents per million train-miles frequency is the number of train accidents, multiplied by 1,000,000 and divided by total train miles. Train accidents included in this metric meet or exceed the FRA reporting threshold of U.S. $11,200 in damage in 2021 and U.S. $10,700 in damage for 2020 and 2019. The FRA train accidents per million train-miles frequency for CP was 1.10 in 2021 , compared with 0.96 in 2020 and 1.06 in 2019.

47 CP 2021 ANNUAL REPORT

Results of Operations

Income

* Adjusted operating income is defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Operating income was $3,206 million in 2021, a decrease of $105 million, or 3%, from $3,311 million in 2020. This decrease was primarily due to:

•acquisition-related costs of $183 million associated with the KCS acquisition that were recognized in Purchased services and other;

•lower volumes as measured by RTMs;

•the unfavourable impact of the change in foreign exchange ("FX") of $117 million;

•a gain of $68 million recognized in 2020 as a result of the remeasurement to fair value of the previously held equity investment in the Detroit River Tunnel Partnership ("DRTP");

•higher depreciation and amortization of $46 million (excluding FX);

•cost inflation; and

•higher defined benefit ("DB") pension and post-retirement benefits current service cost of $32 million.

This decrease was partially offset by:

•higher freight rates;

•a gain on the exchange of property and construction easements in Chicago of $50 million and higher gains on land sales primarily in B.C. of $29 million;

•lower stock-based compensation of $39 million primarily driven by the impact of changes in share price; and

•the efficiencies generated from improved operating performance and asset utilization.

Adjusted operating income, defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, was $3,389 million in 2021, an increase of $78 million, or 2%, from $3,311 million in 2020. This increase was primarily due to:

•higher freight rates;

•a gain on the exchange of property and construction easements in Chicago of $50 million and higher gains on land sales primarily in B.C. of $29 million;

•lower stock-based compensation of $39 million primarily driven by the impact of changes in share price; and

•the efficiencies generated from improved operating performance and asset utilization.

This increase was partially offset by:

•lower volumes as measured by RTMs;

•the unfavourable impact of the change in FX of $117 million;

•a gain of $68 million recognized in 2020 as a result of the remeasurement to fair value of the previously held equity investment in DRTP;

•higher depreciation and amortization of $46 million (excluding FX);

•cost inflation; and

•higher DB pension and post-retirement benefits current service cost of $32 million.

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Operating income was $3,311 million in 2020, an increase of $187 million, or 6%, from $3,124 million in 2019. This increase was primarily due to:

•liquidated damages, including customer volume commitments, and higher freight rates;

•the efficiencies generated from improved operating performance and asset utilization;

•a gain of $68 million as a result of the remeasurement to fair value of the previously held equity investment in DRTP;

•the impact of harsher winter operating conditions in 2019; and

•decreased operating expense associated with lower casualty costs incurred in 2020.

This increase was partially offset by:

•lower volumes as measured by RTMs;

•higher depreciation and amortization of $71 million (excluding FX);

•cost inflation; and

•higher stock-based compensation of $37 million primarily driven by an increase in stock price.

There were no adjustments to operating income in 2020 and 2019.

Operating Ratio

*Adjusted operating ratio is defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Operating ratio provides the percentage of revenues used to operate the railway. A lower percentage normally indicates higher efficiency in the operation of the railway. The Company’s Operating ratio was 59.9% in 2021, a 280 basis point increase from 57.1% in 2020. This increase was primarily due to:

•acquisition-related costs associated with the KCS acquisition that were recognized in Purchased services and other;

•the unfavourable impact of changes in fuel prices, net of recoveries;

•lower volumes as measured by RTMs;

•a gain recognized in 2020 as a result of the remeasurement to fair value of the previously held equity investment in DRTP;

•higher depreciation and amortization (excluding FX); and

•cost inflation.

This increase was partially offset by higher freight rates and a gain on the exchange of property and construction easements in Chicago and higher gains on land sales primarily in B.C.

Adjusted operating ratio was 57.6% in 2021, a 50 basis point increase from 57.1% in 2020. This increase reflects the same factors discussed above for the increase in Operating ratio, except that Adjusted operating ratio in 2021 excludes the acquisition-related costs associated with the KCS acquisition that were recognized in Purchased services and other.

The Company’s Operating ratio was 57.1% in 2020, a 280 basis point improvement from 59.9% in 2019. This improvement was primarily due to:

•liquidated damages, including customer volume commitments, and higher freight rates;

•the favourable impact of changes in fuel prices;

•the efficiencies generated from improved operating performance and asset utilization; and

•a gain as a result of the remeasurement to fair value of the previously held equity investment in DRTP.

49 CP 2021 ANNUAL REPORT

This improvement was partially offset by:

•higher depreciation and amortization;

•cost inflation; and

•higher stock-based compensation.

There were no adjustments to the operating ratio in 2020 and 2019.

Net Income

*Adjusted income is defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Net income was $2,852 million in 2021, an increase of $408 million, or 17%, from $2,444 million in 2020. This increase was primarily due to the $845 million merger termination payment received in connection with KCS's termination of the Original Merger Agreement and higher freight rates.

This increase was partially offset by:

•acquisition-related costs of $599 million associated with the KCS acquisition including $169 million costs incurred by KCS recognized in Equity loss of KCS;

•lower volumes as measured by RTMs; and

•the unfavourable impact of the change in FX of $90 million.

Net income was $2,444 million in 2020, an increase of $4 million, from $2,440 million in 2019. This increase was primarily due to:

•higher Operating income;

•a deferred tax recovery relating to a tax return filing election for the state of North Dakota; and

•a provision for an uncertain tax item of a prior period in 2019.

This increase was partially offset by:

•an income tax recovery associated with changes in tax rates in 2019;

•lower FX translation gain on U.S. dollar-denominated debt and lease liabilities compared to 2019; and

•lower other components of net periodic benefit recovery.

Adjusted income, defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, was $2,565 million in 2021, an increase of $162 million, or 7%, from $2,403 million in 2020. This increase was primarily due to higher

Adjusted operating income and higher other components of net periodic benefit recovery.

Adjusted income was $2,403 million in 2020, an increase of $113 million, or 5%, from $2,290 million in 2019. This increase was primarily due to higher Operating income, partially offset by lower other components of net periodic benefit recovery.

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Diluted Earnings per Share

*Adjusted diluted EPS is defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Diluted EPS was $4.18 in 2021, an increase of $0.59, or 16%, from $3.59 in 2020. This increase was due to a higher Net income.

Diluted EPS was $3.59 in 2020, an increase of $0.09, or 3%, from $3.50 in 2019. This increase was due to a lower average number of outstanding Common Shares due to the Company's share repurchase program, and higher Net income.

Adjusted diluted EPS, defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, was $3.76 in 2021, an increase of $0.23, or 7%, from $3.53 in 2020. This increase was due to higher Adjusted income.

Adjusted diluted EPS was $3.53 in 2020, an increase of $0.24, or 7%, from $3.29 in 2019. This increase was due to higher Adjusted income and lower average number of outstanding Common Shares due to the Company's share repurchase program.

Return on Average Shareholders' Equity and Adjusted Return on Invested Capital

Return on average shareholders' equity and Adjusted return on invested capital ("Adjusted ROIC") are measures used by management to determine how productively the Company uses its long-term capital investments, representing critical indicators of good operating and investment decisions. Adjusted ROIC is also an important performance criteria in determining certain elements of the Company's long-term incentive plan.

Return on average shareholders' equity was 13.9% in 2021, a 2,010 basis point decrease compared to 34.0% in 2020. This decrease was due to higher average shareholders' equity driven by shares issued for the KCS acquisition and accumulated Net income, partially offset by higher Net income.

Return on average shareholders' equity was 34.0% in 2020, a 160 basis point decrease compared to 35.6% in 2019. This decrease was due to higher average shareholders' equity due to accumulated Net income, partially offset by the impact of the Company's share repurchase program.

Adjusted ROIC was 8.2% in 2021, an 850 basis point decrease compared to 16.7% in 2020. This decrease was primarily due to higher average long-term debt and shares issued for the KCS acquisition and accumulated Adjusted income.

Adjusted ROIC was 16.7% in 2020, a 20 basis point decrease compared to 16.9% in 2019. This decrease was primarily due to higher average long-term debt, partially offset by higher Operating income.

Adjusted ROIC is a Non-GAAP measure, which is defined and reconciled from Return on average shareholders' equity, the most comparable measure calculated in accordance with GAAP, in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Impact of Foreign Exchange on Earnings

Fluctuations in FX affect the Company’s results because U.S. dollar-denominated revenues and expenses are translated into Canadian dollars. U.S. dollar-denominated revenues and expenses increase (decrease) when the Canadian dollar weakens (strengthens) in relation to the U.S. dollar.

51 CP 2021 ANNUAL REPORT

On February 18, 2022, the noon buying rate certified for customs purposes by the U.S. Federal Reserve Bank of New York was U.S. $1.00 = $1.27 Canadian dollars.

The following tables set forth, for the periods indicated, the average exchange rate between the Canadian dollar and the U.S. dollar expressed in the Canadian dollar equivalent of one U.S. dollar, the period end exchange rates, and the high and low exchange rates for the periods indicated. Average exchange rates are calculated by using the exchange rates on the last day of each full month during the relevant period. These rates are based on the noon buying rate certified for customs purposes by the U.S. Federal Reserve Bank of New York set forth in the H.10 statistical release of the Federal Reserve Board.

In 2021, the impact of a weaker U.S. dollar resulted in a decrease in Total revenues of $228 million, a decrease in Total operating expenses of $111 million and a decrease in Net interest expense of $27 million. In 2020, the impact of a stronger U.S. dollar resulted in an increase in Total revenues of $33 million, an increase in Total operating expenses of $23 million and an increase in Net interest expense of $4 million.

The impact of fluctuations in the exchange rate between the Canadian dollar and the U.S. dollar on the Company's results is discussed further in Item 7A. Quantitative and Qualitative Disclosures About Market Risk, Foreign Exchange Risk.

Impact of Fuel Price on Earnings

Fluctuations in fuel prices affect the Company’s results because fuel expense constitutes a significant portion of CP's operating costs. As fuel prices fluctuate, there will be a timing impact on earnings, as discussed further in Item 1. Business, Operations, Fuel Cost Adjustment Program and Item 1A. Risk Factors, Fuel Cost Volatility.

Average Fuel Price (U.S. dollars per U.S. gallon) 2021 2020 2019

For the three months ended – December 31 $ 3.03 $ 1.91 $ 2.53

The impact of fuel price on earnings includes the impacts of provincial and federal carbon taxes and levies recovered and paid, on revenues and expenses, respectively.

In 2021, the unfavourable impact of fuel prices on Operating income was $7 million. Higher fuel prices resulted in an increase in Total operating expenses of $243 million. Higher fuel prices and increased carbon tax recoveries, partially offset by the timing of recoveries from CP's fuel cost adjustment program, resulted in an increase in Total revenues of $236 million from 2020. In 2020, the impact of lower fuel prices resulted in a decrease in Total revenues of $170 million and a decrease in Total operating expenses of $195 million.

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Impact of Share Price on Earnings

Fluctuations in the Common Share price affect the Company's operating expenses because share-based liabilities are measured at fair value. The Company's Common Shares are listed on the Toronto Stock Exchange ("TSX") and the New York Stock Exchange ("NYSE") with ticker symbol "CP". As a result of the five-for-one share split of the Company's issued and outstanding Common Shares, which began trading on a post-split basis on May 14, 2021, per share amounts and all outstanding Common Shares for periods prior to Q2 2021 have been retrospectively adjusted. The following tables indicate the opening and closing Common Share price on the TSX and the NYSE for each quarter, on a post-split basis, and the change in the price of the Common Shares on the TSX and the NYSE for the years ended December 31, 2021, 2020 and 2019:

Opening Common Share price, as at January 1 $ 88.31 $ 66.21 $ 48.45

Opening Common Share price, as at January 1 $ 69.34 $ 50.99 $ 35.52

In 2021, the impact of the change in Common Share prices resulted in an increase in stock-based compensation expense of $11 million compared to $58 million in 2020, and $42 million in 2019.

The impact of share price on stock-based compensation is discussed further in Item 7A. Quantitative and Qualitative Disclosures About Market Risk, Share Price Impact on Stock-Based Compensation.

53 CP 2021 ANNUAL REPORT

Operating Revenues

(1) Freight revenues include fuel surcharge revenues of $535 million in 2021, $297 million in 2020 and $464 million in 2019. Fuel surcharge revenues include recoveries of carbon taxes, levies, and obligations under cap-and-trade programs.

(2) FX adjusted % change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX adjusted % change is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The Company’s revenues are primarily derived from transporting freight. Changes in freight volumes generally contribute to corresponding changes in freight revenues and certain variable expenses, such as fuel, crew costs, and equipment rents. Non-freight revenue is generated from leasing of certain assets; other arrangements, including contracts with passenger service operators and logistical services; and switching fees.

Freight Revenues

Freight revenues were $7,816 million in 2021, an increase of $275 million, or 4%, from $7,541 million in 2020. This increase was primarily due to increased freight revenue per RTM. This increase was partially offset by lower volumes as measured by RTMs.

Freight revenues were $7,541 million in 2020, a decrease of $72 million, or 1%, from $7,613 million in 2019. This decrease was primarily due to lower volumes as measured by RTMs. This decrease was partially offset by higher freight revenue per RTM.

RTMs

RTMs are defined as the movement of one revenue-producing ton of freight over a distance of one mile. RTMs measure the relative weight and distance of rail freight moved by the Company. RTMs for 2021 were 149,686 million, a decrease of 2,205 million, or 1%, compared with 151,891 million in 2020. This decrease was mainly attributable to lower volumes of Grain and Potash. This decrease was partially offset by higher volumes of Metals, minerals and consumer products, Energy, chemicals and plastics, and Automotive.

RTMs for 2020 were 151,891 million, a decrease of 2,487 million, or 2%, compared with 154,378 million in 2019. This decrease was mainly attributable to lower volumes of crude, Coal and frac sand. This decrease was partially offset by higher volumes of Grain, Potash, and Fertilizers and sulphur.

Freight revenue per RTM

Freight revenue per RTM is defined as freight revenue per revenue-producing ton of freight over a distance of one mile. This is an indicator of yield. Freight revenue per RTM was 5.22 cents in 2021, an increase of 0.26 cents, or 5%, from 4.96 cents in 2020. This increase was primarily due to higher fuel surcharge revenue as a result of higher fuel prices of $236 million, higher freight rates, and moving higher volumes of Automotive, which has a higher freight revenue per RTM compared to the corporate average. This increase was partially offset by the unfavourable impact of the change in FX of $226 million.

Freight revenue per RTM was 4.96 cents in 2020, an increase of 0.03 cents, or 1%, from 4.93 cents in 2019. This increase was primarily due to higher liquidated damages, including customer volume commitments, higher freight rates, and the favourable impact of the change in FX of $33 million. This increase was partially offset by the unfavourable impact of lower fuel surcharge revenue as a result of lower fuel prices of $170 million and moving lower volumes of Automotive, which has a higher freight revenue per RTM compared to the corporate average.

Carloads

Carloads are defined as revenue-generating shipments of containers and freight cars. Carloads were 2,735.5 thousand in 2021, an increase of 27.1 thousand, or 1%, from 2,708.4 thousand in 2020. This increase was primarily due to higher volumes of Coal, Metals, minerals and consumer products, Intermodal, and Energy, chemicals and plastics. This increase was partially offset by lower volumes of Grain and Potash.

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Carloads were 2,708.4 thousand in 2020, a decrease of 58.0 thousand, or 2%, from 2,766.4 thousand in 2019. This decrease was primarily due to lower volumes of crude, Coal, and frac sand. This decrease was partially offset by higher volumes of Grain and Potash.

Freight revenue per carload

Freight revenue per carload is defined as freight revenue per revenue-generating shipment of containers or freight cars. This is an indicator of yield. Freight revenue per carload was $2,857 in 2021, an increase of $73, or 3%, from $2,784 in 2020. This increase was primarily due to higher fuel surcharge revenue as a result of higher fuel prices of $236 million and higher freight rates. This increase was partially offset by the unfavourable impact of the change in FX of $226 million.

Freight revenue per carload was $2,784 in 2020, an increase of $32, or 1%, from $2,752 in 2019. This increase was primarily due to higher liquidated damages, including customer volume commitments, higher freight rates, and the favourable impact of the change in FX of $33 million. This increase was partially offset by the unfavourable impact of lower fuel surcharge revenue as a result of lower fuel prices of $170 million.

Non-freight Revenues

Non-freight revenues were $179 million in 2021, an increase of $10 million, or 6%, from $169 million in 2020. This increase was primarily due to revenue recognized for construction easements in Chicago of $13 million, higher leasing revenues, and higher revenue from passenger service operators, partially offset by lower revenue from logistical services and switching fees.

Non-freight revenues were $169 million in 2020, a decrease of $10 million, or 6%, from $179 million in 2019. This decrease was primarily due to lower revenue from passenger service operators.

Lines of Business

Grain

(1) FX adjusted % change does not have any standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures presented by other companies. FX adjusted % change is defined and reconciled in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Grain revenue was $1,684 million in 2021, a decrease of $145 million, or 8%, from $1,829 million in 2020. The decrease was primarily due to lower volumes of Canadian grain to Vancouver and eastern Canada primarily as a result of drought conditions and the unfavourable impact of the change in FX. This decrease was partially offset by higher volumes of U.S. corn to western Canada and the U.S. Pacific Northwest and increased freight revenue per RTM. Freight revenue per RTM increased due to higher freight rates and higher fuel surcharge revenue as a result of higher fuel prices. Carloads decreased more than RTMs due to moving higher volumes of U.S. corn to western Canada and the U.S. Pacific Northwest, which have longer lengths of haul.

Grain revenue was $1,829 million in 2020, an increase of $145 million, or 9%, from $1,684 million in 2019. This increase was primarily due to moving record volumes of Canadian grain, primarily to Vancouver and Thunder Bay, higher volumes of U.S. soybeans and corn to the U.S. Pacific Northwest, higher freight rates, and the favourable impact of the change in FX. This increase was partially offset by decreased freight revenue per RTM. Freight revenue per RTM decreased due to moving proportionately higher volumes of long haul soybeans and corn to the U.S. Pacific Northwest, which also caused RTMs to increase more than carloads, and lower fuel surcharge revenue as a result of lower fuel prices.

55 CP 2021 ANNUAL REPORT

Coal

Coal revenue was $625 million in 2021, an increase of $59 million, or 10%, from $566 million in 2020. This increase was primarily due to increased freight revenue per RTM, higher volumes of Canadian coal to Kamloops, B.C., and higher volumes of U.S. coal to the U.S. Midwest. This increase was partially offset by lower volumes of Canadian coal to Vancouver and the unfavourable impact of the change in FX. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices. RTMs decreased while carloads increased due to moving lower volumes of Canadian coal to Vancouver, which has a longer length of haul, and moving higher volumes of Canadian coal to Kamloops, B.C., which has a shorter length of haul.

Coal revenue was $566 million in 2020, a decrease of $116 million, or 17%, from $682 million in 2019. This decrease was primarily due to lower volumes of Canadian coal primarily to Vancouver, driven by supply chain challenges at both the mines and the ports, lower volumes of U.S. coal to Wisconsin, and decreased freight revenue per RTM. Freight revenue per RTM decreased due to lower fuel surcharge revenue as a result of lower fuel prices.

Potash

Potash revenue was $463 million in 2021, a decrease of $30 million, or 6%, from $493 million in 2020. This decrease was primarily due to lower volumes of export potash to Vancouver and the U.S. Pacific Northwest as a result of construction at the Port of Vancouver and the Port of Portland, lower volumes of domestic potash, and the unfavourable impact of the change in FX. This decrease was partially offset by increased freight revenue per RTM due to higher fuel surcharge revenue as a result of higher fuel prices and higher freight rates. RTMs decreased more than carloads due to moving lower volumes of export potash, which has a longer length of haul.

Potash revenue was $493 million in 2020, an increase of $31 million, or 7%, from $462 million in 2019. This increase was primarily due to higher volumes of export potash following resolved international contract negotiations, higher freight rates, and the favourable impact of the change in FX. This increase was partially offset by decreased freight revenue per RTM due to lower fuel surcharge revenue as a result of lower fuel prices.

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Fertilizers and Sulphur

Fertilizers and sulphur revenue was $305 million in 2021, an increase of $15 million, or 5%, from $290 million in 2020. This increase was primarily due to higher volumes of wet and dry fertilizer and increased freight revenue per RTM. This increase was partially offset by the unfavourable impact of the change in FX and lower volumes of sulphur. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices and higher freight rates. Carloads increased more than RTMs due to moving higher volumes of dry fertilizer within western Canada, which has a shorter length of haul.

Fertilizers and sulphur revenue was $290 million in 2020, an increase of $40 million, or 16%, from $250 million in 2019. This increase was primarily due to higher volumes of dry fertilizers, sulphur, and wet fertilizers, as well as the favourable impact of the change in FX. This increase was partially offset by decreased freight revenue per RTM due to lower fuel surcharge revenue as a result of lower fuel prices. RTMs increased more than carloads due to moving lower volumes of wet and dry fertilizers within Alberta, which has a shorter length of haul.

Forest Products

Forest products revenue was $348 million in 2021, an increase of $20 million, or 6%, from $328 million in 2020. This increase was primarily due to higher volumes of lumber and panel products and increased freight revenue per RTM. This increase was partially offset by the unfavourable impact of the change in FX. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices and higher freight rates.

Forest products revenue was $328 million in 2020, an increase of $24 million, or 8%, from $304 million in 2019. This increase was primarily due to higher volumes of lumber and wood pulp, higher freight rates, and the favourable impact of the change in FX. This increase was partially offset by decreased freight revenue per RTM due to lower fuel surcharge revenue as a result of lower fuel prices. RTMs increased more than carloads due to moving higher volumes of panel products and wood pulp from Canada to the U.S., which has a longer length of haul.

57 CP 2021 ANNUAL REPORT

Energy, Chemicals and Plastics

Energy, chemicals and plastics revenue was $1,563 million in 2021, an increase of $44 million, or 3%, from $1,519 million in 2020. This increase was primarily due to higher volumes of liquefied petroleum gas ("LPG") and other petroleum products as a result of demand recovery from the impact of the COVID-19 pandemic in the prior year, higher fuel surcharge revenue as a result of higher fuel prices, and higher freight rates. The increase was partially offset by decreased freight revenue per RTM due to the unfavourable impact of the change in FX.

Energy, chemicals and plastics revenue was $1,519 million in 2020, a decrease of $15 million, or 1%, from $1,534 million in 2019. This decrease was primarily due to lower volumes of crude, LPG, and biofuels as a result of the COVID-19 pandemic and lower fuel surcharge revenue as a result of lower fuel prices. The decrease was partially offset by increased freight revenue per RTM and higher volumes of plastics. Freight revenue per RTM increased primarily due to higher liquidated damages, including customer volume commitments, and higher freight rates. RTMs decreased more than carloads due to moving lower volumes of crude, which has a longer length of haul.

Metals, Minerals and Consumer Products

Metals, minerals and consumer products revenue was $728 million in 2021, an increase of $99 million, or 16%, from $629 million in 2020. This increase was primarily due to higher volumes of steel and frac sand, higher fuel surcharge revenue as a result of higher fuel prices, and higher freight rates. This increase was partially offset by decreased freight revenue per RTM due to the unfavourable impact of the change in FX. RTMs increased more than carloads due to moving proportionately higher volumes of frac sand, which has a longer length of haul.

Metals, minerals and consumer products revenue was $629 million in 2020, a decrease of $123 million, or 16%, from $752 million in 2019. This decrease was primarily due to lower volumes of frac sand as a result of the COVID-19 pandemic and decreased freight revenue per RTM. This decrease was partially offset by the favourable impact of the change in FX. Freight revenue per RTM decreased due to lower fuel surcharge revenue as a result of lower fuel prices.

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Automotive

Automotive revenue was $376 million in 2021, an increase of $52 million, or 16%, from $324 million in 2020. This increase was primarily due to higher volumes as a result of onboarding customers moving to and from Vancouver, prior year manufacturing plant shutdowns in the second quarter of 2020 across North America as a result of the COVID-19 pandemic, higher fuel surcharge revenue as a result of higher fuel prices, and higher freight rates. This increase was partially offset by decreased freight revenue per RTM due to moving proportionately higher volumes from Vancouver to eastern Canada, which has a longer length of haul, and the unfavourable impact of the change in FX.

Automotive revenue was $324 million in 2020, a decrease of $28 million, or 8%, from $352 million in 2019. This decrease was primarily due to lower volumes caused by manufacturing plant shutdowns in the second quarter of 2020 across North America as a result of the COVID-19 pandemic, and decreased freight revenue per RTM. This decrease was partially offset by the onboarding of customers moving to and from Vancouver, higher freight rates, and the favourable impact of the change in FX. Freight revenue per RTM decreased due to lower fuel surcharge revenue as a result of lower fuel prices.

Intermodal

Intermodal revenue was $1,724 million in 2021, an increase of $161 million, or 10%, from $1,563 million in 2020. This increase was primarily due to increased freight revenue per RTM, onboarding new international intermodal customers, and higher domestic retail and wholesale intermodal volumes. This increase was partially offset by the completion of an international intermodal customer contract and the unfavourable impact of the change in FX. Freight revenue per RTM increased due to higher fuel surcharge revenue as a result of higher fuel prices and higher freight rates. Carloads increased while RTMs decreased due to moving lower volumes of international intermodal to and from the Port of Vancouver, which has a longer length of haul.

Intermodal revenue was $1,563 million in 2020, a decrease of $30 million, or 2%, from $1,593 million in 2019. This decrease was primarily due to decreased freight revenue per RTM and lower volumes of international intermodal driven by the completion of a customer contract. This decrease was partially offset by the onboarding of a new international intermodal customer, higher freight rates, and the favourable impact of the change in FX. Freight revenue per RTM decreased due to lower fuel surcharge revenues as a result of lower fuel prices.

59 CP 2021 ANNUAL REPORT

Operating Expenses

2021 Operating Expenses 2020 Operating Expenses 2019 Operating Expenses

Operating expenses were $4,789 million in 2021, an increase of $390 million, or 9%, from $4,399 million in 2020. This increase was primarily due to:

•the unfavourable impact of higher fuel prices of $243 million;

•acquisition-related costs of $183 million associated with the KCS acquisition that were recognized in Purchased services and other;

•a gain of $68 million recognized in 2020 as a result of the remeasurement to fair value of the previously held equity investment in DRTP;

•higher depreciation and amortization of $46 million (excluding FX);

•impact of cost inflation; and

•higher DB pension and post-retirement benefits current service cost of $32 million.

This increase was partially offset by:

•the favourable impact of the change in FX of $111 million;

•a gain on the exchange of property and construction easements in Chicago of $50 million and higher gains on land sales primarily in B.C. of $29 million;

•lower stock-based compensation of $39 million primarily driven by the impact of changes in share price; and

•efficiencies generated from improved operating performance and asset utilization.

Operating expenses were $4,399 million in 2020, a decrease of $269 million, or 6%, from $4,668 million in 2019. This decrease was primarily due to:

•the favourable impact of lower fuel price of $195 million;

•efficiencies generated from improved operating performance and asset utilization;

•a gain of $68 million as a result of the remeasurement to fair value of the previously held equity investment in DRTP;

•reduced variable expenses from lower volumes;

•the impact of harsher winter operating conditions in 2019; and

•lower casualty costs incurred in 2020.

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This decrease was partially offset by:

•higher depreciation and amortization of $71 million (excluding FX);

•cost inflation;

•higher stock-based compensation of $37 million primarily driven by an increase in stock price; and

•the unfavourable impact of the change in FX of $23 million.

Compensation and Benefits

Compensation and benefits expense includes employee wages, salaries, fringe benefits, and stock-based compensation. Compensation and benefits expense was $1,570 million in 2021, an increase of $10 million, or 1%, from $1,560 million in 2020. This increase was primarily due to:

•the impact of wage and benefit inflation;

•higher DB pension and post-retirement benefits current service cost of $32 million; and

•increased training costs driven by recovery from the economic downturn caused by COVID-19 in the prior year.

This increase was partially offset by:

•lower stock-based compensation of $39 million primarily driven by the impact of changes in share price;

•the favourable impact of the change in FX of $27 million; and

•prior year bonus paid to frontline employees of $17 million.

Compensation and benefits expense was $1,560 million in 2020, an increase of $20 million, or 1% from $1,540 million in 2019. This increase was primarily due to:

•the impact of wage and benefit inflation;

•higher stock-based compensation of $37 million primarily driven by an increase in stock price;

•higher DB pension and post-retirement benefits current service cost of $33 million;

•a bonus paid to frontline employees of $17 million; and

•the unfavourable impact of the change in FX of $5 million.

This increase was partially offset by:

•labour efficiencies generated from improved operating performance and asset utilization;

•reduced training costs;

•lower volume variable expense as a result of decreased workload as measured by GTMs; and

•the impact of weather related costs as a result of harsh winter operating conditions in the first quarter of 2019.

Fuel

Fuel expense consists mainly of fuel used by locomotives and includes provincial, state, and federal fuel taxes. Fuel expense was $854 million in 2021, an increase of $202 million, or 31%, from $652 million in 2020. This increase was primarily due to the unfavourable impact of higher fuel prices of $243 million.

This increase was partially offset by:

•the favourable impact of the change in FX of $29 million;

•an increase in fuel efficiency of 1% from improvements in the operating plan resulting in running longer and heavier trains; and

•a decrease in workload, as measured by GTMs.

Fuel expense was $652 million in 2020, a decrease of $230 million, or 26%, from $882 million in 2019. This decrease was primarily due to:

•the favourable impact of lower fuel prices of $195 million;

•a decrease in workload, as measured by GTMs; and

•an improvement in fuel efficiency of 1% from improved winter operating conditions in the first quarter of 2020.

This decrease was partially offset by the unfavourable impact of the change in FX of $8 million.

61 CP 2021 ANNUAL REPORT

Materials

Materials expense includes the cost of material used for maintenance of track, locomotives, freight cars, and buildings as well as software sustainment. Materials expense was $215 million in 2021, a decrease of $1 million, from $216 million in 2020. This decrease was primarily due to the favorable impact of the change in FX of $3 million and a decrease in freight car maintenance, partially offset by an increase in fuel costs.

Materials expense was $216 million in 2020, an increase of $6 million, or 3%, from $210 million in 2019. This increase was primarily due to higher spending on locomotive maintenance and overhauls, and track maintenance.

Equipment Rents

Equipment rents expense includes the cost associated with using other companies’ freight cars, intermodal equipment, and locomotives, net of rental income received from other railways for the use of CP’s equipment. Equipment rents expense was $121 million in 2021, a decrease of $21 million, or 15%, from $142 million in 2020. This decrease was primarily due to:

•higher receipts for CP freight cars used by other railways;

•price incentives received on intermodal cars; and

•the favourable impact of the change in FX of $8 million.

This decrease was partially offset by greater usage of pooled freight cars.

Equipment rents expense was $142 million in 2020, an increase of $5 million, or 4%, from $137 million in 2019. This increase was primarily due to lower receipts for CP freight cars used by other railways and the unfavourable impact of the change in FX of $2 million, partially offset by lower usage of pooled freight cars as a result of lower volumes.

Depreciation and Amortization

Depreciation and amortization expense represents the charge associated with the use of track and roadway, buildings, rolling stock, information systems, and other depreciable assets. Depreciation and amortization expense was $811 million for 2021, an increase of $32 million, or 4%, from $779 million in 2020. This increase was primarily due to a higher asset base, as a result of the capital program spending in 2021 and recent years, and the impact of depreciation studies. This was partially offset by the favourable impact of the change in FX of $14 million.

Depreciation and amortization expense was $779 million for 2020, an increase of $73 million, or 10%, from $706 million in 2019. This increase was primarily due to:

•a higher asset base, as a result of the capital program spending in 2020;

•the impact of depreciation studies and other adjustments made in 2019; and

•the unfavourable impact of the change in FX of $2 million.

Purchased Services and Other

Purchased services and other expense encompasses a wide range of third-party costs, including contractor and consulting fees, locomotive and freight car repairs performed by third parties, property and other taxes, intermodal pickup and delivery services, casualty expense, expenses for joint facilities, and gains on land sales. Purchased services and other expense was $1,218 million in 2021, an increase of $168 million, or 16%, from $1,050 million in 2020. This increase was primarily due to:

•the acquisition-related costs of $183 million related to the KCS acquisition, reported in Other;

•a gain in 2020 of $68 million as a result of the remeasurement to fair value of the previously held equity investment in DRTP, reported in Other;

•higher expenses primarily due to an increased number and severity of casualty incidents, reported in Casualty;

CP 2021 ANNUAL REPORT62

•expenses due to the wildfire response in B.C., reported in Support and facilities, and Track and operations; and

•an increase in legal and consulting fees, reported in Support and facilities.

This increase was partially offset by:

•a gain on the exchange of property and construction easements in Chicago of $50 million and higher gains on land sales primarily in B.C. of $29 million;

•the favourable impact of the change in FX of $30 million;

•a $16 million legal claim recovery, reported in Other; and

•a $7 million arbitration settlement, reported in Track and operations.

Purchased services and other expense was $1,050 million in 2020, a decrease of $143 million, or 12%, from $1,193 million in 2019. This decrease was primarily due to:

•a gain of $68 million as a result of the remeasurement to fair value of the previously held equity investment in DRTP, reported in Other.

•lower expenses primarily due to reduced number and severity of casualty incidents, reported in Casualty;

•reduced business travel and event cost due to COVID-19, reported in primarily Support and facilities and Track and operations;

•a decrease in charges associated with contingencies of $10 million, reported in Other; and

•reduced variable expenses from lower volumes, reported in Intermodal and Equipment.

This decrease was partially offset by lower gains on land sales of $11 million in 2020, reported in Land sales and the unfavourable impact of the change in FX of $6 million.

Other Income Statement Items

Equity Loss of Kansas City Southern

On December 14, 2021, following the consummation of the KCS acquisition, the shares of KCS were placed into a voting trust while the United States Surface Transportation Board (“STB”) considers the Company's control application. In 2021, the Company recognized a $141 million equity loss from the date of acquisition of KCS closing into the voting trust to December 31, 2021 in the Company's Consolidated Statements of Income. The equity loss was attributable to the acquisition-related costs incurred during this period. No similar equity loss existed in the same period of 2020.

Other Expense (Income)

Other expense (income)consists of gains and losses from the change in FX on debt and lease liabilities and working capital, costs related to financing, shareholder costs, equity income, and other non-operating expenditures. Other expense was $237 million in 2021, a change of $244 million, or 3,486%, from income of $7 million in 2020. This change was primarily due to acquisition-related costs of $247 million which include losses on interest rate hedges of $264 million and bridge facility and backstop revolver fees of $52 million, partially offset by gains on cash held for the KCS acquisition of $56 million and gains on FX hedges of $13 million.

Other income was $7 million in 2020, a decrease of $82 million, or 92%, from $89 million in the same period of 2019. This decrease was primarily due to a lower FX translation gain on U.S. dollar-denominated debt and lease liabilities of $80 million.

FX translation gains and losses on debt and lease liabilities and acquisition-related costs are discussed further in Non-GAAP Measures of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Merger Termination Fee

On May 21, 2021, KCS terminated the Agreement and Plan of Merger (the "Original Merger Agreement") with CP to enter into a definitive agreement with Canadian National Railway. At the same time and in accordance with the terms of the Original Merger Agreement, KCS paid CP a termination fee of $845 million (U.S. $700 million). This amount is reported as "Merger termination fee" in the Company's Consolidated Statements of Income in 2021. No similar items were received in the same period of 2020.

Other Components of Net Periodic Benefit Recovery

Other components of net periodic benefit recovery is related to the Company's pension and other post-retirement and post-employment benefit plans. It includes interest cost on benefit obligations, expected return on fund assets, recognized net actuarial losses, and amortization of prior service costs. Other components of net periodic benefit recovery were $387 million in 2021, an increase of $45 million, or 13%, from $342 million in 2020. This increase was primarily due to a decrease in the interest cost on the benefit obligation of $56 million and an increase in expected return on fund assets of $14 million, partially offset by an increase in recognized net actuarial losses of $24 million.

63 CP 2021 ANNUAL REPORT

Other components of net periodic benefit recovery were $342 million in 2020, a decrease of $39 million or 10%, from $381 million in 2019. This decrease was primarily due to an increase in recognized net actuarial losses of $85 million and a decrease in expected return on fund assets of $2 million, partially offset by a decrease in the interest cost on the benefit obligation of $47 million.

Net Interest Expense

Net interest expense includes interest on long-term debt and finance leases. Net interest expense was $440 million in 2021, a decrease of $18 million, or 4%, from $458 million in 2020. This decrease was primarily due to a change in FX of $27 million and a reduction of interest on long-term debt of $15 million as the result of a lower effective interest rate, partially offset by an increase in interest on long-term debt from debt issuances related to the KCS acquisition in the last quarter of 2021.

Net interest expense was $458 million in 2020, an increase of $10 million, or 2%, from $448 million in 2019. This increase was primarily due to the unfavourable impacts of an increase in debt levels of $34 million and the change in FX of $4 million. This increase was partially offset by a reduction in interest related to long-term debt of $29 million as the result of a lower effective interest rate following the Company's debt refinancing completed in 2019 and 2020.

Income Tax Expense

Income tax expense was $768 million in 2021, an increase of $10 million, or 1%, from $758 million in 2020. The increase was primarily a result of higher taxable earnings due to the $845 million (U.S. $700 million) merger termination payment received in connection with KCS's termination of the Original Merger Agreement, partially offset by acquisition-related costs associated with the KCS acquisition and a lower effective tax rate.

Income tax expense was $758 million in 2020, an increase of $52 million, or 7%, from $706 million in 2019. The increase was primarily due to higher taxable earnings and lower net income tax recoveries in 2020. In 2020, a tax filing election lowered the North Dakota rate resulting in net income tax recoveries of $29 million compared to 2019 when net income tax recoveries were $88 million as a result of an Alberta corporate tax rate decrease, partially offset by a 2019 tax expense for an unrecognized tax benefit of $24 million.

The effective income tax rate for 2021 was 21.23% on reported income and 23.85% on Adjusted income. The effective income tax rate for 2020 was 23.66% on reported income and 24.61% on Adjusted income. The effective income tax rate for 2019 was 22.43% on reported income and 24.96% on Adjusted income. Adjusted income is a Non-GAAP measure, which is discussed further in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Company's expected 2022 effective tax rate is between 24% and 24.5%, which excludes the impact of the change in the equity investment in KCS and associated deferred tax on the outside basis difference during the year. The Company’s 2022 outlook for its effective tax rate is based on certain assumptions about events and developments that may or may not materialize, or that may be offset entirely or partially by new events and developments. These assumptions are discussed further in Item 1A. Risk Factors.

Liquidity and Capital Resources

The Company's primary sources of liquidity include its Cash and cash equivalents, commercial paper program, bilateral letter of credit facilities, and revolving credit facility. The Company believes that these sources as well as cash flow generated through operations and existing debt capacity are adequate to meet its short-term and long-term cash requirements. The Company is not aware of any material trends, events, or uncertainties that would create any deficiencies in the Company's liquidity.

During 2021, the Company obtained commitments for a 364-day senior unsecured facility (the “bridge facility”) in the amount of U.S. $8.5 billion to bridge debt financing required to fund a portion of the cash component of the KCS acquisition. This bridge facility was terminated on December 2, 2021 upon the issuance of debt. On December 14, 2021, the Company issued 262.6 million Common Shares to KCS common stockholders at the exchange ratio of 2.884 Common Shares per share of KCS common stock to fund the remaining component of the KCS acquisition.

As at December 31, 2021, the Company had $69 million of Cash and cash equivalents compared to $147 million at December 31, 2020.

As at December 31, 2021, the Company's revolving credit facility was undrawn, unchanged from December 31, 2020, from a total available amount of U.S. $1.3 billion. Effective April 9, 2021, the Company amended its revolving credit facility to modify certain provisions relating to the calculation of the financial covenant ratio in its revolving credit facility. Effective September 24, 2021, the Company entered into an amendment to extend the two-year tranche and the five-year tranche of its revolving credit facility to September 27, 2023 and September 27, 2026, respectively. Effective September 29, 2021, the Company entered into a further amendment to its revolving credit facility in order to provide financial covenant flexibility for the anticipated acquisition financing pertaining to the KCS acquisition, which is in place for a two-year period from the date the acquisition closed. In 2021, the Company also entered into a U.S. $500 million unsecured non-revolving term credit facility with a maturity date of March 15, 2022. As at December 31, 2021, the unsecured non-revolving term credit facility was fully drawn. The credit facility agreements require the Company to maintain a financial covenant. As at

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December 31, 2021, the Company was in compliance with all terms and conditions of the credit facility arrangements and satisfied the financial covenants.

The Company has a commercial paper program that enables it to issue commercial paper up to a maximum aggregate principal amount of U.S. $1.0 billion in the form of unsecured promissory notes. This commercial paper program is backed by the revolving credit facility. As at December 31, 2021, total commercial paper borrowings were U.S. $265 million (December 31, 2020 – U.S. $644 million).

As at December 31, 2021, under its bilateral letter of credit facilities, the Company had letters of credit drawn of $58 million from a total available amount of $300 million (December 31, 2020 - $59 million). Under the bilateral letter of credit facilities, the Company has the option to post collateral in the form of Cash or cash equivalents, equal at least to the face value of the letter of credit issued. As at December 31, 2021, the Company did not have any collateral posted on its bilateral letter of credit facilities (December 31, 2020 – $nil).

Contractual Commitments

The Company’s material cash requirements from known contractual obligations and commitments to make future payments primarily consist of long-term debt and related interest, supplier purchases, leases, and other long term liabilities. Outstanding obligations related to debt and leases can be found in Item 8. Financial Statements and Supplementary Data, Note 18 Debt and Note 21 Leases. Interest obligations related to debt and finance leases amount to $634 million within the next 12 months, with the remaining amount committed thereafter of $13,503 million.

Supplier purchase agreements and other long-term liabilities amount to $676 million and $56 million within the next 12 months, respectively, with the remaining amount committed thereafter of $914 million and $435 million, respectively. Other long-term liabilities includes expected cash payments for environmental remediation, post-retirement benefits, worker’s compensation benefits, long-term disability benefits, pension benefit payments for the Company’s non-registered supplemental pension plan, and certain other long-term liabilities. Pension payments are discussed further in Critical Accounting Estimates of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Guarantees

Refer to Item 8. Financial Statements and Supplementary Data, Note 28Guarantees for details.

Operating Activities

Cash provided by operating activities was $3,688 million in 2021, an increase of $886 million, or 32%, compared to $2,802 million in 2020. This increase was primarily due to higher cash generating income as a result of the $845 million merger termination payment received from KCS in the second quarter of 2021.

Cash provided by operating activities was $2,802 million in 2020, a decrease of $188 million, or 6%, compared to $2,990 million in 2019. This decrease was primarily due to lower receipts from customers in advance of performing services, compared to 2019.

Investing Activities

Cash used in investing activities was $13,730 million in 2021, an increase of $11,700 million, or 576%, from $2,030 million in 2020. This increase was primarily due to cash payments made to KCS and their stockholders for the acquisition of KCS, compared to the acquisition of DRTP in 2020, as well as lower additions to properties during 2021.

Cash used in investing activities was $2,030 million in 2020, an increase of $227 million, or 13%, from $1,803 million in 2019. This increase was primarily due to the acquisition of DRTP in 2020, compared to the acquisition of CMQ in 2019.

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Capital Programs

Additions to capital

Information systems software 47 45 55

Less:

Track installation capital programs

Track miles of rail capacity expansion (miles) 9 28 11

Track and roadway expenditures include the replacement and enhancement of the Company’s track infrastructure. Of the $970 million additions in 2021 (2020 – $1,161 million), approximately $907 million (2020 – $1,008 million) was invested in the renewal of depleted assets, namely rail, ties, ballast, signals, and bridges. Approximately $10 million (2020 – $25 million) was spent on Positive Train Control compliance requirements and $53 million (2020 – $128 million) was invested in network improvements and growth initiatives.

Rolling stock investments encompass locomotives and railcars. In 2021, expenditures on locomotives were approximately $121 million (2020 – $126 million) and were focused on the continued re-investment in CP's existing locomotive fleet. Railcar investment of approximately $176 million (2020 – $127 million) was largely focused on renewal of depleted assets, including the acquisition of covered hoppers for grain transportation.

In 2021, CP invested approximately $47 million (2020 – $45 million) in information systems software primarily focused on rationalizing and enhancing business systems and providing real-time data. Investments in buildings were approximately $105 million (2020 - $103 million) and included items such as facility upgrades, renovations and shop equipment. Other items were $132 million (2020 – $126 million) and included investments in containers, work equipment and vehicles.

For 2022, CP expects to invest approximately $1.55 billion in its capital programs, which will be financed with cash generated from operations. Approximately 60% to 70% of the planned capital programs is for track and roadway. Approximately 15% to 20% is expected to be allocated to rolling stock, including railcars and locomotive improvements. Approximately 5% is expected to be allocated to information services, and 5% is expected to be allocated to buildings. Other investments is expected to be 5% to 10%. Additional discussion of capital commitments can be found in Item 8. Financial Statements and Supplementary Data, Note 27 Commitments and Contingencies.

Free Cash

CP generated positive Free cash of $1,793 million in 2021, an increase of $636 million, or 55%, from $1,157 million in 2020. This increase was primarily due to an increase in cash provided by operating activities, before the Merger termination fee and Acquisition-related costs from KCS, and lower capital additions.

CP generated positive Free cash of $1,157 million in 2020, a decrease of $200 million, or 15%, from $1,357 million in 2019. This decrease was primarily due to a decrease in cash provided by operating activities.

Free cash is affected by seasonal fluctuations and by other factors including the size of the Company's capital programs. The 2021 capital programs are discussed above. Free cash is defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

CP 2021 ANNUAL REPORT66

Financing Activities

Cash provided by financing activities was $9,936 million in 2021, a change of $10,700 million, or 1401%, from cash used in financing activities of $764 million in 2020. This change was primarily due to issuances of U.S $6.7 billion and $2.2 billion notes and a U.S. $500 million term loan to fund the cash consideration component of the KCS acquisition, as well as a pause on payments to buy back shares under the Company's share repurchase program due to the KCS acquisition.

This was partially offset by:

•issuances of U.S. $500 million 2.050% notes due March 5, 2030 and $300 million 3.050% notes due March 9, 2050 in 2020;

•net repayments of commercial paper during 2021 compared to net issuances during 2020;

•principal repayment of U.S. $250 million of the Company's 9.450% notes at maturity in August 2021;

•acquisition-related financing fees; and

•higher dividends paid in 2021.

Cash used in financing activities was $764 million in 2020, a decrease of $347 million, or 31%, from $1,111 million in 2019. This decrease was primarily due to the issuances of U.S. $500 million 2.050% notes due March 5, 2030 and $300 million 3.050% notes due March 9, 2050 in 2020, compared to the issuance of $400 million 3.150% notes due March 13, 2029 in 2019, as well as the principal repayment of U.S. $350 million of the Company's 7.250% notes at maturity in May 2019. This was partially offset by higher payments to buy back shares under the Company's share repurchase program, lower net issuances of commercial paper during 2020, and higher dividends paid during 2020.

Credit Measures

Credit ratings provide information relating to the Company’s operations and liquidity, and affect the Company’s ability to obtain short-term and long-term financing and/or the cost of such financing.

A strong investment-grade credit rating is an important measure in assessing the Company’s ability to maintain access to public financing and to minimize the cost of capital. It also affects the ability of the Company to engage in certain collateralized business activities on a cost-effective basis.

Credit ratings and outlooks are based on the rating agencies’ methodologies and can change from time to time to reflect their views of CP. Their views are affected by numerous factors including, but not limited to, the Company’s financial position and liquidity along with external factors beyond the Company’s control.

As at December 31, 2021, CP's credit ratings from Standard & Poor's Rating Services ("Standard & Poor's") remain unchanged from December 31, 2020. During the first quarter of 2021, Moody's Investor Service ("Moody's") downgraded CP's credit rating to Baa2 from Baa1 due to the announcement of the KCS transaction.

Credit ratings as at December 31, 2021(1)

Long-term debt Outlook

Standard & Poor's

Long-term corporate credit BBB+ stable

Senior secured debt A stable

Senior unsecured debt BBB+ stable

Moody's

Senior unsecured debt Baa2 stable

Commercial paper program

Standard & Poor's A-2 N/A

Moody's P-2 N/A

(1) 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. Credit ratings are based on the rating agencies' methodologies and may be subject to revision or withdrawal at any time by the rating agencies.

Financial Ratios

The Long-term debt to Net income ratio was 7.1 in 2021, compared with 4.0 in 2020 and 3.6 in 2019. These increases were primarily due to higher debt.

67 CP 2021 ANNUAL REPORT

The Adjusted net debt to Adjusted earnings before interest, tax, depreciation, and amortization ("EBITDA") ratio was 4.8 in 2021, compared with 2.5 in 2020 and 2.4 in 2019. The increase in the ratio from 2020 to 2021 was primarily due to a higher debt balance in connection with the KCS acquisition. The increase from 2019to2020 was primarily due to a higher debt balance, partially offset by an increase in Adjusted EBITDA. Adjusted net debt to Adjusted EBITDA ratio is defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Over the long term, CP targets an Adjusted net debt to Adjusted EBITDA ratio of 2.0 to 2.5.

Although CP has provided a target Non-GAAP measure (Adjusted net debt to Adjusted EBITDA ratio), management is unable to reconcile, without unreasonable efforts, the target Adjusted net debt to Adjusted EBITDA ratio to the most comparable GAAP measure (Long-term debt to Net income ratio), due to unknown variables and uncertainty related to future results. These unknown variables may include unpredictable transactions of significant value. In recent years, CP has recognized acquisition-related costs (including legal, consulting, and financing fees, fair value gain or loss on FX forward contracts and interest rate hedges, FX gain on U.S. dollar-denominated cash on hand from the issuances of long-term debt to fund the KCS acquisition, and transaction costs (net of tax) incurred by KCS which were recognized within the Equity loss of KCS), the merger termination payment received, changes in the outside basis tax difference between the carrying amount of CP's equity investment in KCS and its tax basis of the investment, changes in income tax rates, and a change to an uncertain tax item. KCS has also recognized significant transaction costs and FX gains and losses. These or other similar, large unforeseen transactions affect Net income but may be excluded from CP’s Adjusted EBITDA. Additionally, the U.S.-to-Canada dollar exchange rate is unpredictable and can have a significant impact on CP’s reported results but may be excluded from CP’s Adjusted EBITDA. In particular, CP excludes the FX impact of translating the Company’s debt and lease liabilities, interest and taxes from Adjusted EBITDA. Please see Forward-Looking Statements in this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion.

Dividend Payout Ratio

The dividend payout ratio was 18.2% in 2021, compared with 19.8% in 2020 and 17.9% in 2019. The decrease in the ratio from 2020 to 2021 was due to higher diluted EPS, partially offset by higher dividends declared per share. The increase in the ratio from 2019 to 2020 was due to higher dividends declared per share, partially offset by higher diluted EPS.

The Adjusted dividend payout ratio was 20.2% in 2021, compared with 20.1% in 2020 and 19.1% in 2019. These increases were due to higher dividends declared per share, partially offset by higher Adjusted diluted EPS. Adjusted dividend payout ratio is defined and reconciled in Non-GAAP Measures of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Over the long term, CP targets an Adjusted dividend payout ratio of 25.0% to 30.0%.

Although CP has provided a target Non-GAAP measure (Adjusted dividend payout ratio), management is unable to reconcile, without unreasonable efforts, the target Adjusted dividend payout ratio to the most comparable GAAP measure (Dividend payout ratio), due to unknown variables and uncertainty related to future results. These unknown variables may include unpredictable transactions of significant value. In recent years, CP has recognized acquisition-related costs (including legal, consulting, and financing fees, fair value gain or loss on FX forward contracts and interest rate hedges, FX gain on U.S. dollar-denominated cash on hand from the issuances of long-term debt to fund the KCS acquisition, and transaction costs (net of tax) incurred by KCS which were recognized within the Equity loss of KCS), the merger termination payment received, outside basis tax differences related to KCS equity earnings or loss, changes in income tax rates, and a change to an uncertain tax item. KCS has also recognized significant transaction costs and FX gains and losses. These or other similar, large unforeseen transactions affect Diluted EPS but may be excluded from CP’s Adjusted diluted EPS. Additionally, the U.S.-to-Canada dollar exchange rate is unpredictable and can have a significant impact on CP’s reported results but may be excluded from CP’s Adjusted diluted EPS. In particular, CP excludes the FX impact of translating the Company’s debt and lease liabilities from Adjusted diluted EPS. Please see Forward-Looking Statements in this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion.

Supplemental Guarantor Financial Information

Canadian Pacific Railway Company (“CPRC”), a 100%-owned subsidiary of Canadian Pacific Railway Limited (“CPRL”), is the issuer of certain securities which are fully and unconditionally guaranteed by CPRL on an unsecured basis. The other subsidiaries of CPRC do not guarantee the securities and are referred to below as the “Non-Guarantor Subsidiaries”. The following is a description of the terms and conditions of the guarantees with respect to securities for which CPRC is the issuer and CPRL provides a full and unconditional guarantee.

As of the date of the filing of the Form 10-K, CPRC had U.S. $12,050 million principal amount of debt securities outstanding due through 2115, and U.S. $30 million and GBP £3 million in perpetual 4% consolidated debenture stock, for all of which CPRL is the guarantor subject to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended. As of the same date, CPRC also had $3,300 million principal amount of debt securities issued under Canadian Securities Law due through 2050 for which CPRL is the guarantor and not subject to the Exchange Act.

CPRL fully and unconditionally guarantees the payment of the principal (and premium, if any) and interest on the debt securities and consolidated debenture stock issued by CPRC, any sinking fund or analogous payments payable with respect to such securities, and any additional amounts payable when they become due, whether at maturity or otherwise. The guarantee is CPRL’s unsubordinated and unsecured obligation and ranks equally with all of CPRL’s other unsecured, unsubordinated obligations.

CP 2021 ANNUAL REPORT68

CPRL will be released and relieved of its obligations under the guarantees after obligations to the holders are satisfied in accordance with the terms of the respective instruments.

Pursuant to Rule 13-01 of the SEC's Regulation S-X, the Company provides summarized financial and non-financial information of CPRC in lieu of providing separate financial statements of CPRC.

More information on the securities under this guarantee structure can be found in Exhibit 22.1 List of Issuers and Guarantor Subsidiaries of this annual report.

Summarized Financial Information

The following tables present summarized financial information for CPRC (Subsidiary Issuer) and CPRL (Parent Guarantor) on a combined basis after elimination of (i) intercompany transactions and balances among CPRC and CPRL; (ii) equity in earnings from and investments in the Non-Guarantor Subsidiaries; and (iii) intercompany dividend income.

Statements of Income

CPRC (Subsidiary Issuer) and CPRL (Parent Guarantor)

Income before income tax expense 2,734 2,407

(1) Includes net lease costs incurred from non-guarantor subsidiaries for the year ended December 31, 2021 and 2020 of $431 million and $435 million, respectively.

(2) Includes Other expense (income), Merger termination fee, Other components of net periodic benefit recovery, and Net interest expense.

Balance Sheets

CPRC (Subsidiary Issuer) and CPRL (Parent Guarantor)

Assets

Liabilities

Other non-current liabilities 3,008 2,981

69 CP 2021 ANNUAL REPORT

Excluded from the Income Statements and Balance Sheets above are the following significant intercompany transactions and balances that CPRC and CPRL have with the Non-Guarantor Subsidiaries:

Cash Transactions with Non-Guarantor Subsidiaries

CPRC (Subsidiary Issuer) and CPRL (Parent Guarantor)

Dividend income from non-guarantor subsidiaries $ 297 $ 163

Capital contributions to non-guarantor subsidiaries (134) —

Return of capital from non-guarantor subsidiaries 1,370 198

Balances with Non-Guarantor Subsidiaries

CPRC (Subsidiary Issuer) and CPRL (Parent Guarantor)

Assets

Accounts Receivable, intercompany $ 344 $ 327

Short-term advances to affiliates 2,859 20

Long-term advances to affiliates 7,616 9

Liabilities

Accounts payable, intercompany $ 212 $ 179

Short-term advances from affiliates 2,777 3,658

Long-term advances from affiliates 82 82

Share Capital

At February 22, 2022, the latest practicable date prior to the date of this Annual Report on Form 10-K, there were 929,712,071 Common Shares and no preferred shares issued and outstanding, which consists of 15,332 holders of record of the Common Shares. In addition, CP has a Management Stock Option Incentive Plan (“MSOIP”), under which key officers and employees are granted options to purchase the Common Shares. Options issued prior to the share split further described in Results of Operations of this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations now each provide rights over five shares. For consistency, all number of options presented herein are shown on the basis of the number of shares subject to the options. At February 22, 2022, 8,144,004 options were outstanding under the MSOIP and stand-alone option agreements entered into with Mr. Keith Creel. There are 2,504,311 options available to be issued by the Company’s MSOIP in the future. CP also has a Director's Stock Option Plan (“DSOP”), under which directors are granted options to purchase Common Shares. There are no outstanding options under the DSOP, which has 1,700,000 options available to be issued in the future.

Non-GAAP Measures

The Company presents Non-GAAP measures to provide a basis for evaluating underlying earnings and liquidity trends in the Company’s business that can be compared with the results of operations in prior periods. In addition, these Non-GAAP measures facilitate a multi-period assessment of long-term profitability, allowing management and other external users of the Company’s consolidated financial information to compare profitability on a long-term basis, including assessing future profitability, with that of the Company’s peers.

These Non-GAAP measures have no standardized meaning and are not defined by GAAP and, therefore, may not be comparable to similar measures presented by other companies. The presentation of these Non-GAAP measures is not intended to be considered in isolation from, as a substitute for, or as superior to the financial information presented in accordance with GAAP.

Non-GAAP Performance Measures

The Company uses adjusted earnings results including Adjusted income, Adjusted diluted earnings per share, Adjusted operating income, and Adjusted operating ratio to evaluate the Company’s operating performance and for planning and forecasting future business operations and future profitability.

CP 2021 ANNUAL REPORT70

These Non-GAAP measures are discussed further in other sections of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. These Non-GAAP measures provide meaningful supplemental information regarding operating results because they exclude certain significant items that are not considered indicative of future financial trends either by nature or amount. As a result, these items are excluded for management assessment of operational performance, allocation of resources, and preparation of annual budgets. These significant items may include, but are not limited to, restructuring and asset impairment charges, individually significant gains and losses from sales of assets, acquisition-related costs (including legal, consulting, and financing fees, fair value gain or loss on FX forward contracts and interest rate hedges, FX gain on U.S. dollar-denominated cash on hand from the issuances of long-term debt to fund the KCS acquisition, and transaction costs (net of tax) incurred by KCS which were recognized within the Equity loss of KCS), the merger termination payment received, the FX impact of translating the Company’s debt and lease liabilities (including borrowings under the credit facility), discrete tax items, changes in the outside basis tax difference between the carrying amount of CP's equity investment in KCS and its tax basis of this investment, changes in income tax rates, changes to an uncertain tax item, and certain items outside the control of management. These items may not be non-recurring. However, excluding these significant items from GAAP results allows for a consistent understanding of the Company's consolidated financial performance when performing a multi-period assessment including assessing the likelihood of future results. Accordingly, these Non-GAAP financial measures may provide insight to investors and other external users of the Company's consolidated financial information.

In 2021, there were four significant items included in Net income as follows:

•in the fourth quarter, a deferred tax recovery of $33 million on changes in the outside basis difference of the equity investment in KCS that favourably impacted Diluted EPS by 5 cents;

•in the second quarter, merger termination payment received of $845 million ($748 million after current taxes) in connection with KCS's termination of the Original Merger Agreement effective May 21, 2021, that favourably impacted Diluted EPS by $1.11;

•during the course of the year, acquisition-related costs of $599 million in connection with the KCS acquisition ($500 million after current tax recovery of $107 million net of deferred tax expense of $8 million), including an expense of $183 million recognized in Purchased services and other, $169 million recognized in Equity loss of KCS, and $247 million recognized in Other expense (income), that unfavourably impacted Diluted EPS by 75 cents as follows:

–in the fourth quarter, acquisition-related costs of $157 million ($157 million after current tax recovery of $13 million net of deferred tax expense of $13 million), including costs of $36 million recognized in Purchased services and other, $169 million in Equity loss of KCS, and a $48 million recovery recognized in Other (income) expense, that unfavourably impacted Diluted EPS by 22 cents;

–in the third quarter, acquisition-related costs of $98 million ($80 million after current tax recovery of $61 million net of deferred tax expense of $43 million), including costs of $15 million recognized in Purchased services and other and $83 million recognized in Other expense (income), that unfavourably impacted Diluted EPS by 12 cents;

–in the second quarter, acquisition-related costs of $308 million ($236 million after current taxes of $25 million and deferred taxes of $47 million), including costs of $99 million recognized in Purchased services and other and $209 million recognized in Other expense (income), that unfavourably impacted Diluted EPS by 35 cents; and

–in the first quarter, acquisition-related costs of $36 million ($27 million after current taxes of $8 million and deferred taxes of $1 million), including costs of $33 million recognized in Purchased services and other and $3 million recognized in Other expense (income), that unfavourably impacted Diluted EPS by 4 cents; and

•during the course of the year, a net non-cash gain of $7 million ($6 million after deferred tax) due to FX translation of debt and lease liabilities that favourably impacted Diluted EPS by 1 cent as follows:

–in the fourth quarter, a $32 million loss ($28 million after deferred tax) that unfavourably impacted Diluted EPS by 4 cents;

–in the third quarter, a $46 million loss ($40 million after deferred tax) that unfavourably impacted Diluted EPS by 6 cents;

–in the second quarter, a $52 million gain ($45 million after deferred tax) that favourably impacted Diluted EPS by 7 cents; and

–in the first quarter, a $33 million gain ($29 million after deferred tax) that favourably impacted Diluted EPS by 4 cents.

In 2020, there were two significant items included in Net income as follows:

•in the fourth quarter, a deferred tax recovery of $29 million due to a change relating to a tax return filing election for the state of North Dakota that favourably impacted Diluted EPS by 5 cents; and

•during the course of the year, a net non-cash gain of $14 million ($12 million after deferred tax) due to FX translation of debt and lease liabilities that favourably impacted Diluted EPS by 2 cents as follows:

–in the fourth quarter, a $103 million gain ($90 million after deferred tax) that favourably impacted Diluted EPS by 13 cents;

–in the third quarter, a $40 million gain ($38 million after deferred tax) that favourably impacted Diluted EPS by 6 cents;

–in the second quarter, an $86 million gain ($82 million after deferred tax) that favourably impacted Diluted EPS by 12 cents; and

–in the first quarter, a $215 million loss ($198 million after deferred tax) that unfavourably impacted Diluted EPS by 28 cents.

In 2019, there were three significant items included in Net income as follows:

•in the fourth quarter, a deferred tax expense of $24 million as a result of a provision for an uncertain tax item of a prior period that unfavourably impacted Diluted EPS by 3 cents;

•in the second quarter, a deferred tax recovery of $88 million due to the change in the Alberta provincial corporate income tax rate that favourably impacted Diluted EPS by 13 cents; and

71 CP 2021 ANNUAL REPORT

•during the course of the year, a net non-cash gain of $94 million ($86 million after deferred tax) due to FX translation of debt and lease liabilities that favourably impacted Diluted EPS by 12 cents as follows:

–in the fourth quarter, a$37 million gain ($32 million after deferred tax) that favourably impacted Diluted EPS by 4 cents;

–in the third quarter, a $25 million loss ($22 million after deferred tax) that unfavourably impacted Diluted EPS by 3 cents;

–in the second quarter, a $37 million gain ($34 million after deferred tax) that favourably impacted Diluted EPS by 4 cents; and

–in the first quarter, a $45 million gain ($42 million after deferred tax) that favourably impacted Diluted EPS by 6 cents.

In 2018, there were two significant items included in Net income as follows:

•in the second quarter, a deferred tax recovery of $21 million due to reductions in the Missouri and Iowa state tax rates that favourably impacted Diluted EPS by 3 cents; and

•during the course of the year, a net non-cash loss of $168 million ($150 million after deferred tax) due to FX translation of debt that unfavourably impacted Diluted EPS by 21 cents as follows:

–in the fourth quarter, a $113 million loss ($103 million after deferred tax) that unfavourably impacted Diluted EPS by 14 cents;

–in the third quarter, a $38 million gain ($33 million after deferred tax) that favourably impacted Diluted EPS by 5 cents;

–in the second quarter, a $44 million loss ($38 million after deferred tax) that unfavourably impacted Diluted EPS by 5 cents; and

–in the first quarter, a $49 million loss ($42 million after deferred tax) that unfavourably impacted Diluted EPS by 6 cents.

In 2017, there were five significant items included in Net income as follows:

•in the second quarter, a charge on hedge roll and de-designation of $13 million ($10 million after deferred tax) that unfavourably impacted Diluted EPS by 2 cents;

•in the second quarter, an insurance recovery of a legal settlement of $10 million ($7 million after current tax) that favourably impacted Diluted EPS by 1 cent;

•in the first quarter, a management transition recovery of $51 million related to the retirement of Mr. E. Hunter Harrison as CEO of CP ($39 million after deferred tax) that favourably impacted Diluted EPS by 5 cents;

•during the course of the year, a net deferred tax recovery of $541 million as a result of changes in income tax rates that favourably impacted Diluted EPS by 75 cents as follows:

–in the fourth quarter, a deferred tax recovery of $527 million, primarily due to the U.S. tax reform, that favourably impacted Diluted EPS by 73 cents;

–in the third quarter, a deferred tax expense of $3 million as a result of the change in the Illinois state corporate income tax rate change that had no impact to Diluted EPS; and

–in the second quarter, a deferred tax recovery of $17 million as a result of the change in the Saskatchewan provincial corporate income tax rate that favourably impacted Diluted EPS by 3 cents; and

•during the course of the year, a net non-cash gain of $186 million ($162 million after deferred tax) due to FX translation of debt that favourably impacted Diluted EPS by 22 cents as follows:

–in the fourth quarter, a $14 million loss ($12 million after deferred tax) that unfavourably impacted Diluted EPS by 2 cents;

–in the third quarter, a $105 million gain ($91 million after deferred tax) that favourably impacted Diluted EPS by 12 cents;

–in the second quarter, a $67 million gain ($59 million after deferred tax) that favourably impacted Diluted EPS by 8 cents; and

–in the first quarter, a $28 million gain ($24 million after deferred tax) that favourably impacted Diluted EPS by 4 cents.

CP 2021 ANNUAL REPORT72

Reconciliation of GAAP Performance Measures to Non-GAAP Performance Measures

The following tables reconcile the most directly comparable measures presented in accordance with GAAP to the Non-GAAP measures as discussed further in other sections of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations:

Adjusted income is calculated as Net income reported on a GAAP basis adjusted for significant items.

For the year ended December 31

Less significant items (pre-tax):

Insurance recovery of legal settlement — — — — 10

Charge on hedge roll and de-designation — — — — (13)

Management transition recovery — — — — 51

Acquisition-related costs (599) — — — —

Merger termination fee 845 — — — —

Add:

Tax effect of adjustments(1) (1) 2 8 (18) 36

Income tax rate changes — (29) (88) (21) (541)

Provision for uncertain tax item — — 24 — —

(1) The tax effect of adjustments was calculated as the pre-tax effect of the adjustments multiplied by the applicable tax rate for the above items of 0.51%, 13.58%, 8.55%, 10.64% and 15.27% for the years presented, respectively. The applicable tax rates reflect the taxable jurisdictions and nature, being on account of capital or income, of the significant items.

Adjusted diluted earnings per share is calculated using Adjusted income, as defined above, divided by the weighted-average diluted number of Common Shares outstanding during the period as determined in accordance with GAAP.

For the year ended December 31

Less significant items (pre-tax):

Insurance recovery of legal settlement — — — — 0.01

Charge on hedge roll and de-designation — — — — (0.02)

Management transition recovery — — — — 0.07

Acquisition-related costs (0.88) — — — —

Merger termination fee 1.24 — — — —

Add:

Provision for uncertain tax item — — 0.04 — —

73 CP 2021 ANNUAL REPORT

Adjusted operating income is calculated as Operating income reported on a GAAP basis less significant items.

For the year ended December 31

Less significant item:

Management transition recovery — — — — 51

Acquisition-related costs (183) — — — —

Operating ratio is calculated as operating expenses divided by revenues. Adjusted operating ratio excludes those significant items that are reported within Operating income.

For the year ended December 31

Less significant item:

Management transition recovery — — — — (0.8)

Acquisition-related costs 2.3 — — — —

Adjusted ROIC

Return on average shareholders' equity is calculated as Net income divided by average shareholders' equity, averaged between the beginning and ending balance over a rolling 12-month period. Adjusted ROIC is calculated as Adjusted return divided by Adjusted average invested capital. Adjusted return is defined as Net income adjusted for interest expense, tax effected at the Company’s adjusted annualized effective tax rate, and significant items in the Company’s Consolidated Financial Statements, tax effected at the applicable tax rate. Adjusted average invested capital is defined as the sum of total Shareholders' equity, Long-term debt, and Long-term debt maturing within one year, as presented in the Company's Consolidated Financial Statements, each averaged between the beginning and ending balance over a rolling 12-month period, adjusted for the impact of significant items, tax effected at the applicable tax rate, on closing balances as part of this average. Adjusted ROIC excludes significant items reported in the Company's Consolidated Financial Statements, as these significant items are not considered indicative of future financial trends either by nature or amount, and excludes interest expense, net of tax, to incorporate returns on the Company’s overall capitalization. Adjusted ROIC is a performance measure that measures how productively the Company uses its long-term capital investments, representing critical indicators of good operating and investment decisions made by management, and is an important performance criteria in determining certain elements of the Company's long-term incentive plan. Adjusted ROIC, which is reconciled below from Return on average shareholders' equity, the most comparable measure calculated in accordance with GAAP, is discussed further in Results of Operations of this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Calculation of Return on average shareholders' equity

For the year ended December 31

CP 2021 ANNUAL REPORT74

Reconciliation of Net Income to Adjusted Return

For the year ended December 31

Add:

Significant items (pre-tax):

Insurance recovery of legal settlement — — — — (10)

Charge on hedge roll and de-designation — — — — 13

Management transition recovery — — — — (51)

Acquisition-related costs 599 — — — —

Merger termination fee (845) — — — —

Tax on significant items(2) (1) 2 8 (18) 36

Income tax rate changes — (29) (88) (21) (541)

Provision for uncertain tax item — — 24 — —

(1) Tax was calculated at the adjusted annualized effective tax rate of 23.85%, 24.61%, 24.96%, 24.55%, and 26.42% for each of the above items for the years presented, respectively.

(2) Tax was calculated as the pre-tax effect of the adjustments multiplied by the applicable tax rate of 0.51%, 13.58%, 8.55%, 10.64%, and 15.27% for each of the above items for the years presented, respectively. The applicable tax rates reflect the taxable jurisdictions and nature, being on account of capital or income, of the significant items.

Reconciliation of Average shareholders' equity to Adjusted average invested capital

For the year ended December 31

Less:

Significant items (pre-tax):

Insurance recovery of legal settlement — — — — 5

Charge on hedge roll and de-designation — — — — (7)

CP US Equity

CP · 10-K · period ended 2021-12-31

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CP US Equity☆

CP · 10-K · period ended 2021-12-31

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CP US Equity