The Federal Court of Appeal has issued a ruling concerning the financial regulations governing the transportation of western grain, dismissing an appeal by the Canadian National Railway Company1. The decision, delivered on December 31, 2025, settles a dispute over whether the Canadian Transportation Agency was required to adjust revenue caps in response to the extraordinary inflationary pressures caused by the COVID-19 pandemic and the conflict in Ukraine. The court ultimately found that the Agency acted within its discretionary powers when it refused to vary its previous financial determinations, even though the actual costs incurred by the railway were significantly higher than what the government’s forecasts had predicted.
For more than a quarter of a century, the federal government has regulated the pricing for rail transportation of export grain from western Canada. This regulation is achieved through a mechanism known as the Maximum Revenue Entitlement, which functions as a ceiling on the total revenue a railway can earn for moving grain in a given crop year. While railways like Canadian National Railway, often referred to as CN Rail, have the freedom to set their own freight rates based on market conditions, their total annual earnings from western grain must stay below this cap. If a railway exceeds this limit, it is legally required to pay the excess amount, along with a financial penalty, to the Western Grains Research Foundation.
Central to this revenue cap is a mathematical formula that includes the Volume-Related Composite Price Index. This index acts as an inflation multiplier, intended to reflect the rising costs of labour, fuel, materials, and capital items. The Canadian Transportation Agency is responsible for determining this index before each crop year begins, using predictive models and historical data provided by the railways. Because the index is determined at least three months before the crop year starts, it relies heavily on forecasts. The system is designed with a retrospective adjustment mechanism, where any forecasting errors from one year are corrected in the following year’s index. This creates a one-year lag between the time a cost is experienced and the time it is factored into the revenue cap.
The dispute at the heart of this case began during the 2021/2022 and 2022/2023 crop years. During this period, the global economy experienced a massive spike in inflation. CN Rail pointed to what it described as unpredictable, once-in-a-century events, specifically the ongoing effects of the pandemic and the outbreak of war in Ukraine. These events led to a surge in the prices of steel, fabricated metals, and petroleum-related products. While the historical forecasting variance in the price index typically ranged between a 4 percent decrease and a 3.6 percent increase, the variances for these specific years jumped to 7.44 percent and 12.19 percent.
CN Rail argued that these unprecedented discrepancies led to its revenue entitlement being seriously undervalued. The company estimated that it lost approximately 175 million dollars in revenue space over the two-year period. Because the revenue cap was set too low based on inaccurate forecasts, CN Rail claimed it was forced to absorb massive losses while being prevented from charging shippers rates that reflected the true cost of transportation. Consequently, the railway exceeded its revenue limits and was ordered by the Agency to pay over 3.2 million dollars for the 2021/2022 crop year and 3.6 million dollars for the 2022/2023 crop year to the Western Grains Research Foundation.
In early 2023, CN Rail filed applications under Section 32 of the Canada Transportation Act, asking the Agency to review and vary its previous decisions. Section 32 allows the Agency to rescind or change a decision if there has been a change in the facts or circumstances pertaining to the original order. CN Rail contended that the extraordinary nature of the pandemic and the Ukraine conflict, combined with the resulting financial losses, constituted a change in facts that required an immediate correction of the revenue cap, rather than waiting for the standard one-year lag adjustment.
The Canadian Transportation Agency denied these requests in two separate decisions issued in 2023. The Agency reasoned that a forecasting variance does not qualify as a change in facts under the law. According to the Agency, a forecast is by definition a prediction, and inaccuracies are an expected part of the system’s design. The Agency emphasized that the current methodology already provides a way to address these variances by adjusting the following year’s index. The Agency further noted that the regulatory system for grain is built on the principles of stability and predictability. Changing the rules mid-season would make it difficult for grain producers and shippers to budget their costs when selling grain to international customers.
CN Rail appealed these denials to the Federal Court of Appeal, arguing that the Agency had interpreted its own powers too narrowly. The railway suggested that the Agency’s refusal to act was a legal error, as the pandemic and the war were clearly new facts that had surfaced after the initial revenue caps were set. CN Rail proposed a remedial credit system where the Agency would grant the railway extra revenue space in future years to make up for the 175 million dollars it claimed to have lost. Canadian Pacific Railway Company also participated in the proceedings as an intervener, seeking to ensure that if the court ruled in favour of CN Rail, the same relief would be applied to them as well.
The court’s analysis, led by Justice Pamel, focused on the specific wording of Section 32 of the Canada Transportation Act. The court noted that the law gives the Agency the power to review decisions if, in the opinion of the Agency, there has been a change in facts. The inclusion of the phrase “in the opinion of the Agency” was deemed crucial. The court found that Parliament intended to give the Agency wide discretion to decide what constitutes a relevant change in circumstances. Justice Pamel observed that the court should not interfere with policy-heavy decisions that fall within the Agency’s specialized expertise unless a clear legal error has occurred.
The court also addressed the fundamental nature of the grain revenue cap system. It noted that the Maximum Revenue Entitlement is not a cost-recovery system designed to ensure railways are reimbursed for their actual expenses. Instead, it is an inflation-indexed system that provides an incentive for railways to become more efficient. If a railway can lower its operating costs through technological improvements or better management, it is allowed to keep the resulting profit. Conversely, if costs rise faster than inflation, the railway bears the risk. The court cited previous legal precedents establishing that the formula does not contemplate an examination of actual costs, but rather applies an inflation allowance to historical figures.
Regarding CN Rail’s argument that the pandemic and the war were extraordinary “Black Swan” events, the court remained unpersuaded. The judgment pointed out that COVID-19 had already been a known factor for two years by the time some of these determinations were made, and the geopolitical tensions involving Russia and Ukraine were also well-documented prior to the full-scale invasion. More importantly, the court held that the magnitude of a forecasting error does not change the legal nature of the error itself. Whether a forecast is off by a small amount or a large amount, it remains a forecast within a system that values predictability for all stakeholders.
The court also found that CN Rail’s proposed remedial credit system would be inconsistent with the existing legal framework. Allowing the Agency to grant extra revenue space to compensate for past losses would essentially require a rewrite of the statutory formula prescribed by Parliament. The court noted that such a change would create a domino effect, undermining the finality of Agency decisions and creating uncertainty throughout the western grain industry. If the Agency were to begin adjusting revenue caps mid-season whenever a railway experienced a loss, it would likely also have to do so when railways experienced unexpected gains, leading to a constant cycle of litigation and administrative reviews.
On the issue of procedural fairness, the court rejected CN Rail’s claim that the Agency had failed to provide adequate reasons or a fair opportunity to be heard. The court found that the Agency’s decisions were transparent and that it was entitled to rely on its own experience and mandate when considering the importance of industry predictability. The court concluded that the Agency had properly exercised its discretion and that there was no basis for the court to overturn the original decisions.
The Federal Court of Appeal dismissed both of CN Rail’s appeals. The court also decided not to award costs to any of the parties involved. While CN Rail had raised concerns about the Agency’s initial refusal to produce certain documents during the litigation, the court found that the Agency’s conduct did not warrant a penalty in costs. The ruling ensures that the existing one-year lag system for inflationary adjustments remains the standard for the Canadian grain transportation industry, maintaining the current balance between railway revenue limits and the financial predictability required by grain producers and shippers.
Read about other federal court cases here.
