NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
1. SUMMARY DESCRIPTION OF THE PLAN
The following description of the CP 401(k) Savings Plan (the “Plan”) is provided for general informational purposes only. Participants should refer to the Plan document for complete information regarding the Plan’s definitions, benefits, eligibility, and other matters.
General - The Plan is a defined contribution savings plan covering all eligible employees of Soo Line Railroad Company, Delaware and Hudson Railway Company, Inc., and Dakota, Minnesota and Eastern Railroad Corporation ("DM&E") (the “Companies”). The Plan Investment Committee controls and manages the administration of the Plan. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended, and the Internal Revenue Code (the “Code”), as amended. Wells Fargo Bank, N.A. (the “Trustee”) is the trustee and record-keeper of the Plan.
Eligibility - Qualified employees may participate in the Plan if they have reached the age of 18 and have completed 30 days of service with the Companies.
Contributions - Allowed pretax and/or post-tax participant contributions to the Plan were in a range of 1% to 100% of their compensation as an elective deferral savings contribution under Section 401(k) of the Code. Participants may change their contribution percentage every pay period. Transportation Communications International Union participants who accumulate a balance of 80 hours of sick pay as of December 31 of each year may elect to convert a certain portion of these sick days into additional contributions to the Plan. The maximum sick leave that a participant has the option to convert into a sick leave pay deposit to the Plan is 80 hours per year. The value of the sick leave pay deposit is calculated using the hours elected by the participant, multiplied by a base pay amount, which is adjusted for cost of living as provided by the Plan document. These deposits are then included as employee contributions. The maximum allowable contribution percentage limitation at the Companies’ discretion was 100% but is limited to the maximum allowable deductible for federal income tax purposes of $19,500 in 2020 (2019 - $19,000).
The Plan provides for an employer matching contribution of 50% of the first 6% of eligible compensation that the participant contributes. Participating union employees are eligible to receive matching contributions only if their collective bargaining agreement so provides. No employee is eligible for an employer matching contribution on their catch-up contributions. Participants who have attained age 50 before or at the end of the Plan year are eligible to make catch-up contributions of $6,500 (2019 - $6,000). The Plan allows for participant rollovers from other qualified plans. Participant rollover contributions totaled $594,514 for the year ended December 31, 2020 (2019 - $960,917) and have been included within the participant contributions on the statements of changes in net assets available for benefits. Contributions in excess of Code limitations are returned to participants when determined. There were no excess contributions at December 31, 2020 and 2019.
Participant Accounts - Participants may direct their contributions and existing account balances to one or a combination of the investment options available. Investment options may be changed daily. Each participant’s account is credited with the participant’s contributions, related matching contributions (if applicable), and an allocation of Plan earnings from the participant’s respective elected investment fund options. Participant accounts are also charged with withdrawals and an allocation of plan losses and administrative expenses that are paid by the plan. Earnings of each investment fund are allocated daily based on the participant’s account balances, as defined in the Plan document. Matching contributions are allocated the same as the participant contributions as elected by the participant. The benefit to which a participant is entitled is the benefit that can be provided from the participant’s vested account balance.
Vesting - Participants are immediately vested in the value of their voluntary contributions, and rollover contributions, if any. Non-union employees are immediately vested in their employer matching contributions, plus earnings and losses thereon. DM&E unionized employees are the only unionized employees eligible for matching contributions. The vesting schedule for the matching contribution of DM&E union participants is as follows:
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Years of Vesting Service
|
Vested Percentage
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Less than One
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—
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%
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One but less than Two
|
33
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%
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|
Two but less than Three
|
66
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%
|
|
Three or more
|
100
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%
|
Forfeited Accounts - Forfeitures of the nonvested account balances result from participants (except for non-unionized employees) who withdraw from the Plan before becoming fully vested in the matching contributions and earnings and losses thereon. At the discretion of the Companies, forfeited nonvested accounts may be used to pay reasonable administrative expenses of the Plan; applied to reinstate the participant’s account if the participant resumes employment at the Companies; credited against the Companies’ contributions; used to make any corrective contributions; or allocated among the accounts of the active participants. Unused forfeited accounts balance as of December 31, 2020 was $34,076 (2019 - $55,559). For the year ended December 31, 2020, the amounts used from forfeited nonvested accounts to reduce the employer contributions and pay administrative expenses was $62,320 (2019 - $29,380).
Notes Receivable from Participants - Participants may borrow from their accounts a minimum of $1,000 up to a maximum equal to the lesser of $50,000 or 50% of the vested portion of the participant’s account. Loan maturities are five years or less, unless the loan qualifies as a home loan, in which case a longer time period may be permitted. Loans are repaid ratably over the repayment period through payroll deductions. The interest rate on participant loans is expected to be 2% over the prime lending rate at the time of origination. Interest rates on outstanding loans as of December 31, 2020 and 2019 ranged from 4.25% to 7.50%, with loan maturities at various dates through 2029. Participant loans are collateralized by the underlying participant account balance.
Plan Changes as a Result of COVID-19 - On March 27, 2020, in response to the COVID-19 pandemic, the U.S. Congress enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which includes provisions that impact retirement plan rules for 2020. These provisions include, among other features, allowing qualified individuals who are impacted by COVID-19 to withdraw up to $100,000 from their retirement accounts without penalty regardless of their age, and deferral of loan payments due between March 27, 2020 and December 31, 2020 by one year. Plan management has embedded these CARES Act provisions in the Plan.
Payment of Benefits - Interests are distributed to participants or beneficiaries upon death, disability, retirement, or termination of employment. Participants may elect to withdraw interests subject to certain limitations. Benefit distributions under the Plan are made in either a lump-sum payment of the participant’s account balance, a series of annual or more frequent installments, or a combination thereof, at the discretion of the participant.
Plan Termination - Although the Companies have not expressed any intent to do so, they have the right under the Plan to discontinue their contributions at any time and to terminate the Plan at any time subject to the provisions of ERISA. In the event of Plan termination, the net assets of the Plan will be allocated among the participants or beneficiaries in accordance with the Plan document.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies, which are in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP).
Basis of Accounting - The financial statements of the Plan are prepared under the accrual method of accounting in conformity with U.S. GAAP.
Investment Valuation and Income Recognition - Investments are reported at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See Note 3 for discussion of fair value measurements.
Purchases and sales of investments are recorded on a trade-date basis. Interest income is recorded on an accrual basis. Dividends are recorded on the ex-dividend date. Net appreciation (depreciation) includes the Plan’s gains and losses on investments bought and sold, as well as held during the year.
Notes Receivable from Participants - Notes receivable from participants are measured at their unpaid principal balance, plus any accrued but unpaid interest. In accordance with Internal Revenue Service ("IRS") rules, participant loan defaults by participants who are not eligible to receive actual distributions from the Plan, such as participants who are active employees, are treated as “deemed” distributions under the Plan. In these circumstances, although the outstanding loan balance is reported as taxable income to the participants, the loan balance remains on the participants’ Plan accounts until the participants are eligible to receive a distribution from the Plan. Defaulted participant loans of participants who are eligible to receive distributions from the Plan are reclassified as distributions and offset from their Plan account balances.
Benefit Distributions - Benefit distributions are recorded when paid. The total amount allocated to the accounts of participants who elected to withdraw from the Plan but have not yet been paid was $nil at December 31, 2020 (2019 - $73,699).
Excess Contribution Payable - Amounts payable to participants for contributions in excess of amounts allowed by the IRS are recorded as a liability with a corresponding reduction of contributions. Excess contributions are distributed to the
applicable participants in the subsequent plan years. For the years ended December 31, 2020 and 2019, there were no excess contributions.
Investment-Related Expenses - Investment-related expenses are paid out of Plan assets. Management fees and operating expenses charged to the Plan for investments are deducted from income earned on a daily basis and are not separately reflected. Consequently, investment management fees and operating expenses are reflected as a reduction of investment return for such investments. The Companies pay administrative expenses of the Plan at their discretion. There were no unpaid investment-related expenses for the years ended December 31, 2020 or 2019.
Use of Estimates - The preparation of financial statements in conformity with U.S. GAAP requires the Plan’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and changes therein and disclosure of contingent assets and liabilities. The Plan's management regularly reviews its estimates, including those related to the Plan and other benefits based upon currently available information. Actual results could differ from those estimates.
Risks and Uncertainties - The Plan provides for investments that, in general, are exposed to various risks, such as interest rates, market conditions, and credit risk. Due to the level of risk associated with certain investment securities, and the inherent uncertainty related to changes in the value of investment securities, it is at least reasonably possible that changes in risk factors in the near term will affect the amounts reported in the Plan’s financial statements.
3. FAIR VALUE MEASUREMENTS
FASB Accounting Standards Codification, Fair Value Measurements and Disclosures ("ASC 820"), provides the framework for measuring fair value. The framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are as follows:
Basis of Fair Value Measurement
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 - Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly; and
Level 3 - Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
Certain investments for which the practical expedient is used to measure fair value at net asset value ("NAV") are not classified in the fair value hierarchy. Instead, those investments are included as a reconciling item so that the total fair value amount of investments in the disclosure is consistent with the fair value investment balance on the statements of net assets available for benefits.
Following is a description of the valuation methodologies used for assets measured at fair value. There have been no changes in the methodologies used at December 31, 2020 and 2019:
Common Stocks - Valued at the closing price reported on the active market on which the individual securities are traded.
Mutual Funds - Valued at the daily closing price as reported by the funds. Mutual funds held by the Plan are open-ended mutual funds that are registered with the Securities and Exchange Commission (“SEC”). These funds are required to publish their daily NAV and to transact at that price. The mutual funds held by the Plan are deemed to be actively traded.
Self-Directed Brokerage Account - The Schwab Personal Choice Retirement Account was introduced in 2020. It includes a variety of common stocks and exchange-traded funds. Participants may choose to allocate funds from other investment options to the Self-Directed Brokerage Account.
Common/Collective Trust - The common/collective trust is a collective stable return fund sponsored by the Trustee. Investment in the trust fund is valued at the NAV as determined by the Trustee by using estimated fair value of the underlying assets owned by the common/collective trust as of December 31, 2020 and 2019. The NAV is used as a practical
expedient for fair value. The NAV is based on the fair value of the underlying assets, which are traded in an active market, minus its liabilities then divided by the number of units outstanding. Generally, under ordinary market conditions, all common/collective trust positions provide daily market liquidity to Plan participants and the Plan. This practical expedient is not used when it is determined to be probable that the fund will sell the investment for an amount different than the reported net asset value. The Plan invests in investment contracts through the Wells Fargo Collective Stable Return Fund (“WFSR Fund”), one of the investment options available under the Plan. Notwithstanding a 12-month replacement notification requirement on the WFSR Fund, the WFSR Fund does not have limiting terms or restrictions on redemption. The WFSR Fund is not subject to future unfunded commitments at December 31, 2020 and 2019.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Wells Fargo Blackrock S&P Index Fund - The fund is a collective investment fund sponsored by the Trustee. Investment in the fund is limited to Qualified Retirement Plans and the fund is not publicly traded. The fund is not registered with the SEC, but is subject to oversight by the Office of the Comptroller of the Currency. The fund is valued by the Trustee on a daily basis each business day using the end of day market value of all securities held in the fund and the total number of outstanding fund units. The individual holdings in the fund are publicly traded on major market exchanges and their end of day price and total shares held are used to determine the fund’s total market value. The fund’s NAV is equal to the total end of day market value of the fund divided by the number of outstanding fund units. Plan participants, or other authorized party may instruct Wells Fargo in writing to redeem some or all Units. Units will be redeemed at the unit value next determined following receipt by Wells Fargo of written redemption instructions. Redemption proceeds will generally be paid to the account within one business day after receipt of the redemption request and in all cases within six business days after such receipt.
Transfers between Levels - The availability of observable market data is monitored to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.
The Plan’s management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total net assets available for benefits. For the years ended December 31, 2020 and 2019, there were no transfers between levels.
The following tables set forth by level, within the fair value hierarchy, the Plan’s investment assets at fair value as of December 31, 2020 and 2019. As required by ASC 820, assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. As of December 31, 2020 and 2019, there were no assets classified as Level 2 or Level 3 valued investments.
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Investments
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As of December 31,
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2020
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2019
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Level 1 - Unadjusted quoted prices in active markets for identical assets:
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Mutual funds
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$
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154,805,351
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$
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132,273,192
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Equity—Canadian Pacific Railway Ltd. stock
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3,259,926
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2,054,387
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Self-directed brokerage account
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349,275
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—
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|
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$
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158,414,552
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$
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134,327,579
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Investments measured at NAV:
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Common/collective trust
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26,281,257
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22,251,172
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Wells Fargo Blackrock S&P 500 index fund
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28,718,492
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25,790,254
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Total investments
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$
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213,414,301
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$
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182,369,005
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4. EXEMPT PARTY-IN-INTEREST TRANSACTIONS
The Trustee is authorized under contract provisions, and by ERISA regulations providing an administrative or statutory exemption, to invest in funds under its control. Certain Plan investments, including shares of mutual funds and units of common/collective trusts, which are managed by the Trustee as defined by the Plan, qualify as exempt party-in-interest transactions. The Plan also issues loans to participants, which are secured by the vested balances in the participant's accounts. Fees paid for investment management services were included as a reduction of the return earned on each fund.
At December 31, 2020 and 2019, the Plan, which is sponsored by Soo Line Railroad Company, a wholly owned subsidiary of Canadian Pacific Railway Limited (the "Company"), held 9,403 and 8,058 shares, respectively, of common stock of the Company. During the year ended December 31, 2020, the Plan recorded dividend income of $22,583 (2019 - $16,433).
5. NONEXEMPT PARTY-IN-INTEREST TRANSACTIONS
The Companies’ remitted certain participant contributions and loan repayments to the Trustee later than required by the Department of Labor (“DOL”) Regulation 2510.3-102 for the year ended December 31, 2019. Participant accounts have been credited with the amount of investment income that would have been earned had the participant contributions and loan repayments been remitted on a timely basis as required by the DOL guidelines. In addition, the Companies filed a Form 5330 with the IRS and paid the required excise tax on the transactions.
6. INCOME TAX STATUS
The Plan constitutes a qualified trust under Section 401(a) of the IRC Code and is, therefore, exempt from federal income taxes under provisions of Section 501(a). The Plan's management believes that the Plan is currently designed and operated in compliance with the applicable requirements of the IRC, and the Plan and related trust continue to be tax-exempt. Therefore, no provision for income taxes has been included in the Plan’s financial statements.
During the year ended December 31, 2019, the Companies discovered certain late benefit contributions that would affect the tax qualified status of the Plan and its related trust. In order to prevent the Plan from losing its qualified status, the Companies took the necessary corrective actions in accordance with the acceptable correction methods of the Employee Plans Compliance Resolution System (EPCRS). Additionally, during the year ended December 31, 2019, it was discovered an immaterial amount of ineligible employer contributions had been made to the Plan for which the Companies took the necessary corrective actions.
U.S. GAAP requires the Plan’s management to evaluate tax positions taken by the Plan and recognize a tax liability (or asset) if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination by the IRS. The Plan’s management has analyzed the tax positions by the Plan, and has concluded that as of December 31, 2020 and 2019, there are no uncertain tax positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the financial statements. Therefore, no provision for income taxes has been included in the Plan’s financial statements. The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits of any tax periods in progress. The Plan’s management believes it is no longer subject to income tax examinations for years prior to 2014.
7. RECONCILIATION TO FORM 5500
The following is a reconciliation of net assets available for benefits per the financial statements to the Form 5500:
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As of December 31,
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2020
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2019
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Net assets available for benefits per the financial statements
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$
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217,528,626
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$
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186,721,752
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Deduct: Benefit claims payable to withdrawing participants
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—
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(73,699)
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Deduct: Deemed distribution of participant loans
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(117,583)
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(122,867)
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Net assets per the Form 5500
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$
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217,411,043
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$
|
186,525,186
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The following is a reconciliation of total net increase in net assets available for benefits per the financial statements to total net increase per the Form 5500:
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Year Ended December 31, 2020
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Total net increase in net assets available for benefits per the financial statements
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$
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30,806,874
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Add: Adjustment for deemed distributions of participant loans
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5,284
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Add: Payments for prior year's benefit claims payable
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73,699
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Total net increase per the Form 5500
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$
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30,885,857
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The following is a reconciliation of net appreciation (depreciation) in fair value of investments per the financial statements to Form 5500:
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Year Ended December 31, 2020
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Net appreciation in fair value of investments per the financial statements
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$
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31,951,844
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Add: Revenue sharing and other income
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52,706
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Add: Other income
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143
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Deduct: Unrealized appreciation of assets
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(830,913)
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Deduct: Net gain on sale of assets
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(34,621)
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Deduct: Self-directed brokerage account earnings
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(31,799)
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Net appreciation in fair value of investments per the Form 5500
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$
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31,107,360
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The following is a reconciliation of employer contributions per the financial statements to the Form 5500:
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Year Ended December 31, 2020
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Employer contributions per the financial statements
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$
|
2,064,085
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Add: Other contributions
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855
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Deduct: Forfeitures applied against employer contributions
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(21,014)
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Employer contributions per the Form 5500
|
$
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2,043,926
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The following is a reconciliation of benefits paid to participants per the financial statements to the Form 5500:
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Year Ended December 31, 2020
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Benefits paid to participants per the financial statements
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$
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(16,750,433)
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Add: Payments for prior year's benefit claims payable
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73,699
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Add: Other items
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103
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Benefits paid to participants per the Form 5500
|
$
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(16,676,631)
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The following is a reconciliation of interest and dividends per the financial statements to the Form 5500:
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|
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Year Ended December 31, 2020
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Interest and dividends per the financial statements
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$
|
1,830,864
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Add: Withholding taxes applied against other income
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5,645
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Interest and dividends per the Form 5500
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$
|
1,836,509
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|
The following is a reconciliation of other income per the financial statements to the Form 5500:
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|
|
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Year Ended December 31, 2020
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Other income per the financial statements
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$
|
31,833
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Deduct: Revenue sharing and other income
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(52,706)
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Deduct: Withholding taxes applied against other income
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(5,645)
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|
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Deduct: Other income
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(143)
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Deduct: Other items
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(103)
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Add: Self-directed brokerage account earnings
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31,799
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|
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Add: Forfeitures applied against employer contributions
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21,014
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|
|
Other income per the Form 5500
|
$
|
26,049
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|
8. SUBSEQUENT EVENTS
Plan management has evaluated the effects of events that have occurred subsequent to December 31, 2020, through June 21, 2021, the date the financials were available to be issued. Other than disclosed below, no such events were identified.
Effective January 1, 2021, the Central Maine & Québec Railway U.S. Inc. ("CMQ U.S.") 401(k) plan merged with and into the Plan. Any participants in the CMQ U.S. plan became a participant in the Plan. CMQ U.S. plan assets of $3,303,107 were merged into the existing Plan. Concurrent with the merger of assets, the accounts were established in the Plan and maintained by the CP 401(k) Plan Administrator.
Effective April 21, 2021, Principal Financial Group Inc. ("Principal") became the trustee and record-keeper of the Plan. This transition occurred as a result of the completion of Principal's acquisition of the Wells Fargo Institutional Retirement & Trust Business, the business unit of Wells Fargo Bank, N.A. that was the Plan's trustee and record-keeper.
SUPPLEMENTAL SCHEDULES
CP 401(k) SAVINGS PLAN
Employer ID No.: 41-6009079
Plan Number: 0002