Although the Canadian Pacific Railway has been a shareholder-owned private company since its incorporation, it has always been closely tied to government decisions and policies. Particularly in the early days of railway construction across Canada, the federal and provincial governments took a key role in railway development. Governments approved routes, granted lands and subsidies for construction, and could determine rates and right-of-way issues. Governments also guaranteed railway loans for construction and, as in the case of the Canadian Northern and Grand Trunk Pacific, ultimately became the owners of bankrupt railways.

In the 1890s, the CPR struggled with the immense task of placing the new transcontinental railway on a paying basis. Branch lines were needed, terminals needed expansion and hundreds of new locomotives and cars were required. At the same time, the economy of North America went into a severe recession or depression in 1893 that took many businesses, including a number of railroads in the United States, into bankruptcy. The Canadian Pacific escaped financial ruin but its resources were stretched to the limits during this period.

Summarizing the situation, William C. Van Horne, CPR president, wrote to British Columbia Premier John H. Turner on February 7, 1896:

We are as anxious as you can be to see it [the Crowsnest railway] built, and we appreciate the fact that it is necessary to prevent the diversion of the business of the Kootenay country southward. But the amount of money required in large - about $7,000,000 - and the setback we have had in the long period of depression, (which I hope is now ended) makes it impossible even yet for us to take steps towards financing for anything like such an amount in addition to what we require for the necessary improvement of our existing lines.

To finance construction the CPR had to raise money through the sale of stocks or by issuing bonds and there was a limit, management felt, on how far the company's resources could be stretched. Van Horne pushed for a government subsidy, loans and land grant to help with construction but the political climate was not always sympathetic and the 1890s were a time of some turmoil in Ottawa before Wilfred Laurier came to power and formed an effective government. Frustrated by delays and at the same time lobbying for support, Van Horne wrote to J. S. Williams, editor of Toronto's Globe newspaper on April 11, 1896:

...The Crows Nest Pass Railway, which should be built by somebody without delay if the permanent diversion southwards of the greater part of the ores of the Kootenay and adjacent districts is to be prevented. Sir John Macdonald realized the importance of this, and urged on by him we built the Columbia & Kootenay Railway and bought the Galt Road extending from Dunmore to Lethbridge; surveyed the line from Lethbridge to Kootenay Lake, and did some grading between Lethbridge and Crows Nest. But after his death, the Government seemed to lose interest in the matter, and we were left to digest a large and useless expenditure of money.

Van Horne was a tireless advocate of the railway and the development of southern British Columbia. On July 17, 1896 he extolled the virtues of the B.C. mining districts to the editor, Mr. Clarke, of The London Advertiser in London, Ontario.

A number of the most prominent smelter and mining experts of the United States who have visited southern British Columbia have told me recently that they regard it as the richest mineral country that was ever opened up. We have opportunities there for half a dozen Butte's, and probably more, and I firmly believe that, by the necessary efforts on the part of the Government, a greater addition can be made to the wealth of the Dominion in the next ten years, from that direction, than has been made all told in the past 30 years. There lies the leaven which will rise life to every business interest in the country.

The CPR and the Federal Government negotiated for months and in the meantime the CPR acquired the charter for the Crows Nest Pass Railway in 1897 which gave them the authority to build the line west of the Crowsnest Pass and authorized a land grant from British Columbia of 20,000 acres per mile (5 029 ha/km) of completed railway.

The negotiations were a delicate balance of politics and business. The government could not be seen to be giving away too much to the CPR without concessions particularly those that would benefit business interests in central Canada. Moreover, there was widespread concern about the monopoly of the CPR in the west and a trade off of subsidies for some government control of rates was appealing. In the end, the agreement between the Federal Government and the Canadian Pacific Railway, formalized in legislation called "An Act to authorize a Subsidy for a Railway through the Crow's Nest Pass," made the following provisions:

• A federal subsidy of $11,000 a mile ($ 6,835 /km) of completed railway to a maximum of $3,630,000 or the equivalent of 330 miles (531 km) of construction west of Lethbridge.
• Federal cabinet approval was required for local and through rates on the Crowsnest route and for rates on CPR lines and steamships south of the mainline in B.C.
• Rate reductions by the CPR on a variety of goods shipped westbound from Fort William, effective January 1, 1898. These included a 1/3 cut in the rates on produce and fruit, 20 percent on coal oil and 10 percent on various manufactured goods particularly important to farming.
• Rates were reduced on grain and flour by 3 cents a hundred weight for shipments to Fort William and Port Arthur and all points east. In the long term the most important feature of this clause, and of the act itself except for the actual construction of the railway, was the requirement, under section 1, e, "that no higher rates than such reduced rates or tolls shall be charged after the dates mentioned on such merchandise from the points aforesaid." The famous "Crow Rates" were enshrined in law.
• The Railway Committee of the Privy Council was given authority to grant running rights over the Crowsnest Pass railway and its branches to other companies.
• The federal cabinet could set regulations for the sale of B.C. Southern Railway Land Grant properties except for coal lands.
• The federal government was to receive 50,000 acres (20 235 ha) of coal bearing lands in the Crowsnest area from the B.C. Southern Railway Land Grant.

Several of the clauses in the agreement had very little to do directly with the construction or operation of the railway through the Crowsnest Pass but they became inseparably associated with the railway in Canadian politics and economics because they defined the "Crow Rates" relating to the shipment of western grain from the Prairies.

A formal contract was worked out after the passage of the legislation. The agreement also provided for the development of the coal mines. The Canadian Pacific retained only 3,840 acres (1 554 ha) of coal reserves in the pass and the remainder, except for the federal government reserve described in the legislation, was transferred to the Crow's Nest Pass Coal Company for development. The area was approximately 240,000 acres (97 000 ha). This company was not a CPR enterprise and control of it was gained within a few years by the CPR's rival, the Great Northern Railway.

At the same time, the CPR and the federal and provincial governments were under pressure to provide better rail connections between Vancouver and the rich mining districts of the Kootenays. Van Horne could see the need for this extension of the railway but considered the costs, particularly of the sections between the Boundary District and the Fraser Valley to be excessive. However, the company did construct an important branch line south from Revelstoke to the head of Upper Arrow Lake and another from the lower end of Slocan Lake to Slocan Junction west of Nelson. These lines greatly improved services to the West Kootenay and at the same time, the CPR purchased the steamer line of the Columbia & Kootenay Steam Navigation Company which operated most of the sternwheelers on the Columbia River and on Kootenay Lake.