Auction Buyback Announced

[KPO]

5 minutes ago, gary17 said:

 

could it be they made statutory deductions on the deemed dividend tax?

From the tender offer statement on sec.gov: “Fairfax estimates that the paid-up capital per Share on the date hereof is approximately C$316.76 (which, for illustrative purposes, is US$252.40 per share when the aggregate C$ paid-up capital balance is converted to US$ using the C$/US$ Bank of Canada average daily exchange rate on November 16, 2021) (and following the Expiration Date, Fairfax will advise Shareholders of any material change to this estimate). As a result, Fairfax expects that Non-Canadian Resident Shareholders who sell Shares pursuant to the Offer will be deemed to receive a dividend for purposes of the Tax Act.”

 

My read is the amount paid of ~$247/ share is the paid-up capital referenced above adjusted for the current exchange rate and a subsequent payment will be made for the “dividend” once Computershare validates the appropriate tax treatment of the account with the brokerage entity. 

[Santayana]

There's a slew of entries relating to this in my US Schwab account, including the "untendering" of 10% of what I tendered,  but one of them has a security description with "pendingdeemeddividend" in the name.

[MMM20]

On 1/1/2022 at 11:25 AM, KPO said:

From the tender offer statement on sec.gov: “Fairfax estimates that the paid-up capital per Share on the date hereof is approximately C$316.76 (which, for illustrative purposes, is US$252.40 per share when the aggregate C$ paid-up capital balance is converted to US$ using the C$/US$ Bank of Canada average daily exchange rate on November 16, 2021) (and following the Expiration Date, Fairfax will advise Shareholders of any material change to this estimate). As a result, Fairfax expects that Non-Canadian Resident Shareholders who sell Shares pursuant to the Offer will be deemed to receive a dividend for purposes of the Tax Act.”

 

My read is the amount paid of ~$247/ share is the paid-up capital referenced above adjusted for the current exchange rate and a subsequent payment will be made for the “dividend” once Computershare validates the appropriate tax treatment of the account with the brokerage entity. 

 

+1, this is my understanding too (I really hope i don't get tax withheld - what a headache)

[KPO]

32 minutes ago, MMM20 said:

 

+1, this is my understanding too (I really hope i don't get tax withheld - what a headache)

I spoke with the tender offer desk at Fidelity earlier today and they confirmed that a payment of ~$253/ share has to be paid by the transfer agent by 8PM ET tomorrow.  They’re playing the float game.

[gfp]

I have a question about FRFHF shares held through Interactive Brokers in some accounts.  I see the FRFHF.DIV corporate action and I get that the 252.77 / share is the portion to be treated as a dividend.  But does it seem to anyone else that this looks to be double counted, inflating the account balance?  In at least one account it seems like the cash from the tender came in and hit the account, plus this additional pending corporate action of 252.77/share also being counted towards account balance.  Hope that makes sense... Anybody else see this in an IB account that tendered shares of FRFHF?  I don't have anything like that in the accounts holding the Canadian shares.

 

By the way, for taxable US accounts tendering FRFHF shares, Interactive Brokers did appear to withhold 15% tax on the portion of the proceeds deemed a dividend (15% of 252.77/share).

Edited January 4, 2022 by gfp

[Santayana]

I'm seeing something similar in my Schwab account.  Some cash has been received, but the shares are still on the books so the total account balance is doing some double counting.  Should get squared away pretty soon here.

[gfp]

Thanks for replying.  I was like, "I know I'm a stud but some of these account NAVs are looking a little too good to be true."

[TwoCitiesCapital]

1 hour ago, gfp said:

I have a question about FRFHF shares held through Interactive Brokers in some accounts.  I see the FRFHF.DIV corporate action and I get that the 252.77 / share is the portion to be treated as a dividend.  But does it seem to anyone else that this looks to be double counted, inflating the account balance?  In at least one account it seems like the cash from the tender came in and hit the account, plus this additional pending corporate action of 252.77/share also being counted towards account balance.  Hope that makes sense... Anybody else see this in an IB account that tendered shares of FRFHF?  I don't have anything like that in the accounts holding the Canadian shares.

 

By the way, for taxable US accounts tendering FRFHF shares, Interactive Brokers did appear to withhold 15% tax on the portion of the proceeds deemed a dividend (15% of 252.77/share).

 

My Schwab account is doing this with the FRFHF shares I owned. 

 

My IB account just shows a line item for a receivable for the full $500/share and no Fairfax shares, but I also owned the Canadian shares at IB which could be the difference. 

[Viking]

RBC just updated all of my accounts to reflect the dutch auction transaction. Wasn’t sure how long it would take. Pleasantly surprised it got done this quickly

[Cevian]

I'm really upset about this. I got charged a huge 25% withholding tax as I'm a foreign investor. I really wasn't expecting a dutch auction to result in a portion of the proceed to be deemed a dividend. Very disappointing. Let me know if anyone has found a way around this.

[beerbaron]

On 12/13/2021 at 7:25 PM, StubbleJumper said:

 

No.  You should read the Issuer Bid Circular which was posted on SEDAR.com  FFH has dedicated a few pages to describe the income tax issues for both Canada and the US.  For your convenience, I have attached the filing.

 

 

SJ

fairfax.pdf 1.46 MB · 19 downloads

Cevian, there was literally 5 pages discussed in this thread, it's not like you were not warned. Reminds me times when I sat in meetings and nobody around the table remembered seeing a memo, although it was directly addressed to all of them the day before. 

 

BeerBaron

[gary17]

1 hour ago, Cevian said:

I'm really upset about this. I got charged a huge 25% withholding tax as I'm a foreign investor. I really wasn't expecting a dutch auction to result in a portion of the proceed to be deemed a dividend. Very disappointing. Let me know if anyone has found a way around this.

 

If you are a holdco, then the deemed dividend may not have any tax if there's 'safe income' at FairFax. that's the only rule i know of.

 

Otherwise no there is no way around it.

 

The concept is to prevent a company's owner from using company cash to buy him/herself out entirely and receive all the proceeds 'tax free' (ie as capital gains that meet certain lifetime exemption limits in Canada, or otherwise at low tax rates ).  It's no diff than paying yourself a wage so it needs to be treated as deemed dividend.

Edited January 5, 2022 by gary17

[KPO]

1 hour ago, beerbaron said:

Cevian, there was literally 5 pages discussed in this thread, it's not like you were not warned. Reminds me times when I sat in meetings and nobody around the table remembered seeing a memo, although it was directly addressed to all of them the day before. 

 

BeerBaron

It did seem like a convoluted way to complete a repurchase compared to the Berkshire path, but I’ll assume this was driven by Fairfax’s relatively low trading volume. 

[StubbleJumper]

13 minutes ago, KPO said:

It did seem like a convoluted way to complete a repurchase compared to the Berkshire path, but I’ll assume this was driven by Fairfax’s relatively low trading volume. 

 

No, there are also stock tenders for US companies all of the time, and many of those are also Dutch auction processes.  When a US tender is announced, it's the same process for shareholders.  You need to download the filing off of EDGAR instead of SEDAR, read the general provisions and then carefully read the income tax treatment.  My conclusion for most of those US tenders is that I am better to exploit them using an registered retirement account because they are exempt from any sort of US withholding tax or income tax under the Canada-US Tax Treaty.  If you don't use a retirement account, then you end up screwing around to make a declaration under Section 302 or 303, which is paperwork that I don't really need in my life.

 

All of that to say, FFH did something completely normal and common, but in this case it involved Canadian tax law instead of US.

 

 

SJ

[ICUMD]

Can you claim a capital loss if your adjusted capital base is more than $252 USD?

 

Overall, it does seem to me that the shareholders are paying tax on the deemed dividend at their own expense and in favor of Fairfax.  (Unless you are in a tax exempt account).

 

 

[Viking]

19 minutes ago, StubbleJumper said:

 

No, there are also stock tenders for US companies all of the time, and many of those are also Dutch auction processes.  When a US tender is announced, it's the same process for shareholders.  You need to download the filing off of EDGAR instead of SEDAR, read the general provisions and then carefully read the income tax treatment.  My conclusion for most of those US tenders is that I am better to exploit them using an registered retirement account because they are exempt from any sort of US withholding tax or income tax under the Canada-US Tax Treaty.  If you don't use a retirement account, then you end up screwing around to make a declaration under Section 302 or 303, which is paperwork that I don't really need in my life.

 

All of that to say, FFH did something completely normal and common, but in this case it involved Canadian tax law instead of US.

 

 

SJ

@StubbleJumper FYI, i found your communication on the tax impact of the dutch auction to be excellent. And bang on. Especially the strategic thinking. It certainly helped me understand a few things i needed to learn more about. And i am VERY happy with how it all played out. Thank you!

[KPO]

26 minutes ago, StubbleJumper said:

 

No, there are also stock tenders for US companies all of the time, and many of those are also Dutch auction processes.  When a US tender is announced, it's the same process for shareholders.  You need to download the filing off of EDGAR instead of SEDAR, read the general provisions and then carefully read the income tax treatment.  My conclusion for most of those US tenders is that I am better to exploit them using an registered retirement account because they are exempt from any sort of US withholding tax or income tax under the Canada-US Tax Treaty.  If you don't use a retirement account, then you end up screwing around to make a declaration under Section 302 or 303, which is paperwork that I don't really need in my life.

 

All of that to say, FFH did something completely normal and common, but in this case it involved Canadian tax law instead of US.

 

 

SJ

Many more simply complete open market purchases, which don’t require the holding or selling shareholders to have deep knowledge of tax law. I guess I'm still unclear of the benefit to the tender approach if, as you suggest, it is not driven by the liquidity of the securities subject to the tender. 

[gary17]

37 minutes ago, ICUMD said:

Can you claim a capital loss if your adjusted capital base is more than $252 USD?

 

Overall, it does seem to me that the shareholders are paying tax on the deemed dividend at their own expense and in favor of Fairfax.  (Unless you are in a tax exempt account).

 

 

i believe deemed dividends are income, not capital gain / loss.

 

[StubbleJumper]

3 minutes ago, KPO said:

Many more simply complete open market purchases, which don’t require the holding or selling shareholders to have deep knowledge of tax law. I guess I'm still unclear of the benefit to the tender approach if, as you suggest, it is not driven by the liquidity of the securities subject to the tender. 

 

No, you are right.  It's mainly about the size the buy-back relative to the daily volume and market cap.  FFH was attempting to repurchase a boatload of shares in percentage terms and it doesn't have enormous daily volume.  It would take months to repurchase that many shares through a NCIB with an average daily volume of 60k and a 25% limit.  2m shares divided by 25% x 60k/day = ~130 trading days?

 

 

SJ

[StubbleJumper]

20 minutes ago, Viking said:

@StubbleJumper FYI, i found your communication on the tax impact of the dutch auction to be excellent. And bang on. Especially the strategic thinking. It certainly helped me understand a few things i needed to learn more about. And i am VERY happy with how it all played out. Thank you!

 

I am mostly happy with out it played out, except that I sold some BRK to make space to buy FFH to exploit the tender.  So, I made ~10% on the FFH, but in the meantime BRK has skyrocketed ~10% over the past month!  After repurchasing the BRK shares with my tender proceeds, I haven't made much money on that portion of my tender.  I'd have been in the same position, more or less, if I had just sat on my ass!  Oh well, even if it didn't work out this time, I guess that's the sort of bet that I should be happy to take as often as possible (a bet that BRK won't soar 10% in a particular month!).

 

I did make a bit of beer money on some of the other shares that I purchased specifically to tender....

 

 

SJ

[Xerxes]

8 minutes ago, StubbleJumper said:

 

I am mostly happy with out it played out, except that I sold some BRK to make space to buy FFH to exploit the tender.  So, I made ~10% on the FFH, but in the meantime BRK has skyrocketed ~10% over the past month!  After repurchasing the BRK shares with my tender proceeds, I haven't made much money on that portion of my tender.  I'd have been in the same position, more or less, if I had just sat on my ass! 

 

That is why i never bother with these things.

At least you got your core FFH / BRK position that is benefitting from all this, if not the actual trade in isolation.

 

[StubbleJumper]

24 minutes ago, Xerxes said:

 

That is why i never bother with these things.

At least you got your core FFH / BRK position that is benefitting from all this, if not the actual trade in isolation.

 

 

It's been a good month to have a value investing orientation.  Can't belly-ache too much these days!

 

 

SJ

[MMM20]

Anyone else (US residents?) still waiting on half the tender cash to hit all their accounts? 

[MMM20]

6 hours ago, Cevian said:

I'm really upset about this. I got charged a huge 25% withholding tax as I'm a foreign investor. I really wasn't expecting a dutch auction to result in a portion of the proceed to be deemed a dividend. Very disappointing. Let me know if anyone has found a way around this.

Ouch. what percentage of your total Fairfax position did you tender? 

 

 

 

 

 

[KPO]

1 hour ago, MMM20 said:

Anyone else (US residents?) still waiting on half the tender cash to hit all their accounts? 

Check again. Mine just came through at Fidelity.