LORD SHAUGHNESSY'S NOTABLE ADDRESS

AT THE

ANNUAL MEETING OF SHAREHOLDERS

CANADIAN PACIFIC RAILWAY*

Chairman

Compared with the returns for the calendar year 1916 the Thirty-seventh Annual Report of the DirecAddress by Lord tors now before you for consideration and approval Shaughnessy, shows an increase in gross revenue from transportation K.C.V.O., of $12,660,000, but this amount was more than President and absorbed by the working expenses, which increased of the C.P.R. $16,590,000, so that the net income from transportation in 1917 was less by $3,930,000 than it was in the previous calendar year. Notwithstanding the larger volume of traffic in 1917, it will be gathered from the statistics incorporated in the Report that there was a substantial decrease in traffic train mileage and loaded car mileage, indicating still further improvement in operating efficiency. In normal times this should be reflected in the working expenses, but its effect was minimized by the higher scale of wages and the enhanced cost of fuel and other materials required for the maintenance and operation of the Railway that prevailed during the year and that added $15,250,000 to the operating expenses. These conditions were not exceptional in the case of your Company, but applied in a proportionate degree to all the other Canadian carriers.

In view of the abnormal and constantly increasing cost of railway operation, the Board of Railway Commissioners, after due deliberation, authorized an increase of ten to fifteen per cent. in specified zones in the tariff of charges for the carriage of passengers and freight. This concession to the Railway Companies to assist them in meeting, in part, the increased cost of transportation services that they are providing is very moderate indeed when compared with the increased prices due to similar causes which the public has to pay for all other commodities. It was clear that without higher rates many of the Railway Companies would be compelled to face large deficits, and so far as it applied to these lines, some of them being wards of the Government, the order of the Board appeared to arouse little objection or criticism. But certain trade bodies and others appealed to the Dominion Government for the disallowance of the Order of the Board of Railway Commissioners on the ground that the additional revenue resulting from the higher rates would, in the case of the Canadian Pacific Railway Company, have the effect of supplementing that Company's substantial surplus

This much-discussed Address was delivered at Montreal on May 1st, 1918.

income after the payment of fixed charges and dividends. To enable the weaker Companies to reap the benefit of the higher rates, and at the same time to meet the objections that had been urged to the participation of the Canadian Pacific in like benefits, the Government decided to permit the advance in rates for the carriage of traffic authorized by the Board of Railway Commissioners to become effective March 15, 1918, but concurrent with this decision there was an Order of the Governor-General in Council under the War Measures Act, substantially as follows:

1. The Canadian Pacific Railway Company, hereinafter called "The Company," shall pay to the Government of Canada the following special taxes:

1st. One half of its net earnings from railway operations in excess of seven per cent. on its Common Stock (after paying fixed charges, appropriation for Pension Fund, and dividends on Preferred Stock).

2nd.-Income tax on the Company's special income (inclusive of all the Com pany's income, except earnings from railway operations), under the provisions of The Income War Tax Act, 1917, or any amendment thereof hereafter enacted.

Provided that the total amount to be paid each year by the Company shall not be less than

(1) The Company's net earnings in such year from railway operations, and from special income as defined above, in excess of 10% on its Common Stock (after paying fixed charges, appropriation for Pension Fund and dividends on Preferred Stock), up to $7,000,000, or

(2) The amount by which its net earnings from railway operations exceed the net earnings from railway operations for the fiscal year ended December 31st, 1917, due to the increase in freight and passenger rates granted by the Order of the Board of Railway Commissioners, dated 26th December, 1917.

3. Payment in full of special taxes under this order shall in respect of earnings from and after January 1st, 1918, relieve the Company of liability under the Business Profits War Tax Act, 1916, and any other Dominion Act of like nature hereafter enacted, and (save as hereinbefore provided) under the Income War Tax Act, 1917. 4. This Order shall be deemed to have come into force and effect on the first day of January, 1918, and to continue in force and effect during the present war, and until further ordered.

Briefly stated, this Order-in-Council not only deprives your Company of any improved revenue that might result from the higher tariff, but imposes upon it a measure of taxation discriminatory in character, and therefore your Company might with propriety question its fairness or justification. A state of war, with its enormous demands upon the National Treasury, and other financial burdens brought upon the country by an unfortunate railway policy, coupled with the thriving condition of your Company's affairs, were in all probability taken as furnishing reasonable warrant for the Government's action. Since the outbreak of war your Company has deemed it a duty to render to Canada and the Allies all the practical and financial assistance in its power, and while it is not possible with constantly changing conditions to form at this time even an approximate estimate of the tax, the amount, whatever it may be, will be paid without protest or embarrassment to your finances. It must not be assumed that in the adoption of this measure the Government was actuated by any spirit of hostility to the Company. On the contrary, it may be stated without reservation that at no other time has your Company enjoyed the confidence and support of Parliament, the Government and the people to a greater extent than at present. Nor should the Government's action be assumed

to forecast a policy in the future that might jeopardize investments in Canadian Government, Municipal or Corporation Securities.

What is commonly called "Canada's Railway Problem" has, for some months past, occupied a place in the attention of the Canadian people second only to the affairs of war, and expedients designed to lighten the burden imposed on the Public Treasury by the railway situation have been considered and discussed by the Public and the Press. Not unnaturally your Company has, by reason of its outstanding position in the business affairs of the country, been brought into the discussion. It was evident that some of the writers and speakers who took part had but imperfect information or were guided by traditional misconception when dealing with the affairs of your Company. Although more than 90% of its securities are owned abroad, your Company is essentially Canadian in its inception, progress and aspirations, and therefore the Directors feel that it is not out of place at this time to give you, for the information of the Canadian public as well as the investors in the property, a brief review of some salient features of the Company's financial policy and progress leading up to its present stable position.

Under the terms of the contract of October 21, 1880, between the Government of Canada and the Syndicate acting for the Canadian Pacific Railway Company in anticipation of the Charter, the Govern ment undertook to give, by way of subsidy, to assist the Company in carrying its enterprise to successful completion, certain sections of railway between Lake Superior and Winnipeg and between Savonas and Port Moody in British Columbia then in process of construction under Government auspices, $25,000,000 in cash and 25,000,000 acres of land suitable for settlement. After work had been in progress for two or three years it was found that the cost was substantially in excess of the estimates, and the Company applied to the Government for further temporary aid by way of loans. When, in 1885, the repayment of the loans was being arranged, the Government decided to accept in part payment a return of 6,700,000 acres of the Land Grant in place of $10,000,000 in cash; in effect, therefore, the subsidy consisted of $35,000,000 in money, 18,300,000 acres of land, and the sections of railway in process of construction by the Government to which reference has already been made. At the outset the Company had expected to raise the requisite funds for the execution of the work by sales in the English market of Capital Stock and of Bonds secured by the Land Grant, thus keeping the railway property free from bonded debt, but it soon became manifest that this was impossible, and, therefore, Parliament was asked to authorize and did authorize the issue of $35,000,000 5% First Mortgage Bonds and $65,000,000 Ordinary Share Capital. Despite a determined effort on the part of the Directors to give confidence to investors by depositing in cash with the Government of Canada an amount sufficient to meet a Government guarantee of dividend at the rate of 3% per annum on the Common Stock for ten years, unfriendly influences at home and abroad were so prejudicial in the English, American and Continental markets that the original

$65,000,000 only yielded to the treasury of the Company an average of somewhat less than 46% of its face value. The unwillingness of investors to pay a higher figure for the Stock in those early days need not be considered extraordinary, however, when we learn that as late as 1895, when the railway had been completed and in operation for more than nine years, the Stock was offered in the market at as low as 33%, with but few takers.

In 1885 the President of the Company, now Lord Mount Stephen, induced Baring Brothers to find purchasers for the $35,000,000 First Mortgage Bonds, and by this means the Company was enabled to repay the loans from Government and to meet its floating debt. It was evident that the main line described in the Agreement, serving as it did thousands of miles of territory almost uninhabited, could not be kept going unless it was brought into touch with the more important commercial centres of Eastern Canada and was provided with branch lines and connections that would contribute traffic to its rails, and, therefore, arrangements were made to reach Montreal, Ottawa, Toronto, and at later stages Quebec, Hamilton, the more important manufacturing towns in Ontario and Quebec, and the Winter port at St. John, N.B., and connections were established at various points along the frontier from the Atlantic to the Pacific with railway systems in the United States. These extensions, feeders and connections were obtained by agreements with a number of Canadian Companies for the acquisition or lease of their properties, the consideration in most cases being a guarantee of interest on their securities by way of rental, and in other cases the Company's credit was utilized for the construction of new lines. In circumstances when the interchange of traffic was a matter of prime importance, the connecting lines in Canada were only built to the International Boundary after the Company had taken the requisite steps to ensure the observance of traffic agreements by the railway lines on the other side of the International Boundary.

Inevitably this policy would lead to a variety of securities in the shape of Bonds assumed by the Company with reference to acquired properties or created and issued to furnish money for construction of new lines, each series secured by a mortgage on the particular property to which it applied. In order to avoid this undesirable situation the Company decided, with the consent of Parliament, to utilize Consolidated Debenture Stock for the purchase or conversion of existing Bonds, and to provide funds for building or acquiring such additional mileage as might appear to be required from time to time for the advantage of the country and the Company. This Consolidated Debenture Stock is perpetual and irredeemable, differing from a mortgage bond in that it gives no right of foreclosure in the event of default. The holders have a first claim on the revenues of the Company for their semi-annual dividends after the working expenses and taxes or fines have been paid, and the contract demands of existing bond-holders have been satisfied. If by any chance the Company failed to pay, within a fixed period, the dividend accrued on the Consolidated Debenture Stock the holders of that Stock would become the Shareholders of

the Company and would control its affairs until the default was made good, when the property would automatically pass back to the Preference and Ordinary Shareholders. In the early period of its history the Company was beset by many difficulties and disappointments, but on the whole its progress was not unsatisfactory. In 1899 the Company had 7,000 miles of railway; its gross earnings were $29,200,000 and after the payment of working expenses there were net earnings of $12,200,000; the funded debt secured by Mortgage Bonds was $47,200,000; Debenture Stock had been sold to the amount of $54,237,000, and the annual fixed interest charges were $6,800,000; while in 1916 the operated system comprised 13,000 miles, with net earnings of $50,000,000 and an increase of only $3,500,000 in the annual interest charges.

After 1899 the Company's traffic commenced to show considerable growth and the necessity for more rolling stock equipment and for traffic facilities and improvements of every possible description became imperative. Year by year with the great expansion of business throughout the country the demand for adequate facilities became more pressing, and the records show that in the years 19021914 inclusive, the Company expended for second tracks, reduction of gradients, terminals, freight yards and facilities, work shops, machinery, and improvements of every character chargeable to Capital, $206,300,000, and for cars, locomotives and other equipment $130,000,000. To meet this expenditure of $336,300,000 Debenture Stock could not legally be utilized and Preference Stock could be issued and sold only in limited amounts. In these circumstances the Directors decided to ask the Ordinary Shareholders of the Company to provide funds as these were required from time to time by taking further allotments of Common Stock. In the thirteen years mentioned the Shareholders were offered and accepted $195,000,000 of Common Stock for which they paid $262,100,000. Out of this, $33,750,000 of Canadian Pacific First Mortgage Bonds were paid off and retired, and $26,200,000 was used to pay the cost of railway lines acquired or constructed and of additional steamships with reference to which no Bonds or Debentures were sold. The remaining amount, $202,150,000, was supplemented by the sale of Preference Stock and Equipment Notes that brought in $56,500,000, making a total of $258,650,000 to apply against expenditures of $336,300,000. The further sum necessary, namely, $77,650,000, was provided from the surplus revenue of the Company. Thus the Company was put in a position to deal efficiently and economically with a large and ever-increasing volume of traffic, and at the same time was able to reduce its bonded debt, the requisite money being provided by the owners of the property who were willing to venture their money on Canada's present and future stability. They were encouraged by the annual accounts of the Company which, year by year, showed most gratifying results and gave ample warrant for every statement made by the Directors.

Notwithstanding the low price at which it was necessary to sell the original $65,000,000 of Common Stock, as already explained, the entire $260,000,000 of this Stock outstanding has yielded to