Inflation, property and capital taxation

I do not post about taxation much in this site simply because it is too depressing.

The last analysis I performed was in the last year of the Trudeau administration, where inclusion rates above $250k would be taxed at 2/3rds of regular income instead of the 1/2 it is today. This proposal got delayed to 2026 on January 31, 2025 and formally shelved by Prime Minister Mark Carney on March 21, 2025.

I identified that the big target of this was not necessarily the doctors and lawyers investing through their corporations (although this was certainly a side target), but rather going after estates and situations that were likely to incur large deemed dispositions.

A story was making the rounds a few days ago where the CRA sucked up about $670k of an (inferring from the tax bill and facts reported in the story) approximate $2M estate. The long story short is that a husband and wife died within a year of each other in their early 60’s and they sold their primary residence 5 years earlier and moved to a ‘cottage’ which was held since 1998 and were only able to claim a partial principal residence exemption. The beneficiaries were complaining that the RRSP collapse coupled with the deemed disposition sucked away most of the liquid RRSP cash, leaving the beneficiaries with “nothing” (let’s ignore the fact there is a cottage remaining at a relatively high cost basis).

At a 2/3rds capital gain inclusion rate, the tax bill for them on the deemed disposition of the cottage would have been an extra $100k or so.

My post is not about the ignorance and feigned outrage of having a large amount of money sucked up but rather the manner of taxation that will increasingly be exhibited in the future. Inheritance taxes are going to increase in countries as the baby boomer generation dies off and the demographic inversion accelerates. The amount of wealth that is transferred will be an irresistible target for governments – we already see countries like Japan that will apply 30% marginal rates above CAD$500,000 equivalent and 40% over CAD$1,000,000. In Canada, the deemed disposition of capital assets on death acts as an effective inheritance tax.

It is pretty obvious at this point that governments are quite keen to collecting higher amounts of taxes through inflation.

The other aspect of capital is while dollars and cents in the monetary system are mobile between countries that have free capital controls, if the taxation and/or inflation situation is too punitive, capital will flow out of the jurisdiction in question. The taxation of immovable or geographically locked assets such as land titles and mineral resources will be subject to increasing scrutiny. In Canada, the administration and taxation of land titles is under the provincial jurisdiction and in British Columbia, land titles have been picked away at with the speculation and vacancy tax (essentially a 1% yearly tax on assessed value if you do not occupy or rent it out), the federal underused housing tax (effectively a tax on foreign ownership) and also the elevated “school tax” (an additional property tax levy on properties assessed at more than $3 million).

There is a Laffer curve that applies to taxation on these immobile assets and this is typically indicative of the pricing of these assets. When projected carrying costs of land titles (taxes, insurance, maintenance, and carried interest) increase, it has an effective of decreasing the capitalized value of the property at hand. There is also a reverse causation – a perceived increase in land title value will also trigger increased interest in land titles. In addition to capturing a captive value on land titles (note: this is irrespective of actual assessed value – rates can simply be increased further in times of decreasing net aggregate assessed values), governments in appreciating markets will capture capital gain value, in addition to property transfer taxes.

It is difficult to say when the tax market has been saturated but on the real estate front, it appears we’re getting close to that point, if not exceeded it. Hence, the lever that is being pulled currently is reducing the cost of capital and trying to instigate demand in the asset markets – to increase volume and also to generate those precious capital gains taxes.

We have a federal government that is going to announce a budget on November 4, 2025. It’s no secret that this budget is going to contain a gigantic amount of spending investment.

At 3.2% on 10-year government debt, why not? To the government, it is virtually free money. And if you’re one of the institutional fund managers out there looking at the bond offerings, where else are you going to put your capital and clear a 300bps equity risk premium? It will simply be paid for in a hidden manner with debasement. For those saying that Japan’s government pulled it off without causing huge amounts of inflation – different culture! North American culture is much more predisposed of spending and debt.

Did I begin this post by saying I don’t write about taxation too often because it is too depressing?

Teck / Anglo American

Less than two months after I wrote about Teck, they have agreed to a so-called “merger of equals” (not! – Anglo will have 62%, Teck 38%, and that is after a US$4.5 billion asset strip!) where Anglo American would take out Teck in a stock swap – Teck holders will receive 1.3301 shares of Anglo American.

The other salient term is that Anglo will also take out US$4.5 billion cash before proceeding with the merger – which is a pretty big way of effectively extracting the remaining equity out of the Teck operation and leveraging the crap out of it! Teck is still relatively under-levered by virtue of selling their coal mining operation (having blown a serious amount of this cash on a buyback at higher stock prices than today). But none of this will matter for Teck shareholders anymore as they will be gone!

The big opportunity here are for so-called synergies (which take a much longer time to materialize, if at all, in these mega-mergers) but there is some basis for finding synergies with Teck’s QB2 project and the Collahuasi mine, which is 44% owned by Anglo and 44% by… Glencore. Collahuasi is about 15 kilometers away from QB2 and there is potential for some engineering synergies to be realized to combining assets, but first Teck has to get its own crap together on QB2!

Anglo, pre-merger, is involved in copper (28% of revenues), Iron (24%), Platinum (22%), the infamous De Beers (yes, the diamond cartel, 12%) and Metallurgical Coal (13%).

Ironically De Beers is the only significant business unit that is not making money for the company at present. Perhaps diamonds are not forever!

Skimming the Anglo financial statements, it is not a company that I want to be holding for very long. It is completely outside of my desired investment profile. All of these synergistic promises will take a ton of time to materialize. The forced internationalization and geographical diversification of executives and staff sounds like a total nightmare to manage. I also don’t want to have to care what’s going on in South Africa – my investment in First Uranium sufficiently traumatized me.

However, I think the institutional money will love it. I actually think there is enough pro-Canada material in there for them to get the stealthy “Canada is open to foreign investment” nod of government approval.

Before thinking there will be a superior counter-proposal, the only logical other suitor out there for Teck was Glencore. After the sale of the coal unit to them, this is simply not happening. The deal should be a done deal. If only Cenovus, Strathcona and MEG Energy was as clear!

Finally, part of the deal was them changing their name from “Anglo American” to “Anglo Teck”. It looks like they were really eager to shed the “American” part of their name and needed an excuse!

I’ll be looking to divest my remaining small stake in Teck, but I am not in any rush. Commodities are skyrocketing (monetary debasement is a very powerful force) and even though it looks like that Anglo American is doing just as bad a job of cost containment as Teck, in a rising price environment they won’t be crashing down anytime soon.

Apparently the merger is expected to take 12-18 months and so this is not to be a case of selling on the first day – there will be a link going forward to Anglo’s common stock and my paper napkin adjusted income has them trading at around a P/E of 14. It’s not as if Microstrategy did a stock swap for them.

I originally acquired a substantial stake in Teck a couple months after everything hit the fan in the 2020 Covid shutdown. About 2/3rds of it was eliminated in 2024 for an average of $66/share. It looks like there will be another opportunity to disposing of the rest soon enough. Needless to say, the market timing has been borderline perfect – it rarely works this way!

Smallcap Time – Andrew Peller

This is another “low risk, medium reward” small cap situation. The risk is tempered with balance sheet assets but also incremental improvement in underlying operations in part due to a significant management transition.

Andrew Peller trades on the TSX as a dual-class stock company (TSX: ADW.a and ADW.b).

The company is a vertically integrated wine conglomerate. They own many producing vineyards in southern British Columbia and southern Ontario. They also own three significant wine production facilities, in Kelowna, BC, Grimsby, Ontario and St. Catherines, Ontario. There are also retail/tourist destinations (the type of places that would host fancy reception parties and the like) in the same geography. Finally, the company owns a significant plot of land in Port Moody, BC which was the subject of municipal rezoning procedures spanning most of a decade but is thankfully done. Unfortunately, since the initial concept was conceived, interest rates have risen and the residential construction market has collapsed in the BC Lower Mainland (similar to the situation in the GTA).

There are headwinds with the main business – the younger demographic is drinking less alcohol than it has historically. Wine sales trends (by volume) suggest that aggregate consumption is flat to slightly negative. There may be opportunities in expanding to alternative markets (e.g. non-alcoholic beverages and the like) but this is going to take development and time. The main value proposition of the company, however, is not through the commodity production of grapes (essentially agricultural production), but rather the distribution network and the accumulation of “mind-share” with its various brands – which is a very expansive collection of names, e.g. Wayne Gretzky Estates and Copper Moon. Branding of wines is very fragmented and it takes nothing other than walking through the shelves of a liquor store to realize the diffuse nature of branding – but if you own multiple brands you get more real estate on the shelf! The company believes it has about a 9% share of the wine market in English Canada, second in the country.

Financially, Covid-19 did not treat the company well, but current results have regressed to the pre-Covid metrics.

Examining the pre-Covid and post-Covid financial metrics, we have a company that posts approximately $400 million in revenues and operating margins of about 11%. Bottom-line net income for the past 12 months total 37 cents a share. The company’s balance sheet has consistently been in a net debt situation, peaking roughly around $200 million during Covid, but presently about $169 million, which is funded by a $275 million available credit facility at 2.5% + CORRA (right now 5.25%). This number is approximately the amount of inventory the company keeps on its books. The assets on the books (including the real property) collateralize the loan. Finally, the company pays out a modest dividend – last couple fiscal years about $10.4 million, which is amply supported when looking at the cash flow statement.

On the downside, Note 17 of the Fiscal 2025 financial statement outlines the amounts of government subsidies they receive from the Wine Sector Support Program and the Ontario Grape Support Program – a non-considerable amount of money that makes gross margins appear far greater than they are in reality. There are political reasons why this stream of money is unlikely to abate, especially in context of the international trade issues with the USA at present.

However, the most significant change that got on my radar was the ownership and changes of management structure.

There are some unusual features worth noting with the dual class stock structure. The Class A shares (35.3M outstanding, trades as ADW.a on the TSX) are non-voting. Class B shares (8.0M outstanding, trades as ADW.b) are voting. Class B shares can be exchanged 1:1 for Class A at any time. The two classes are economically different – Class A shares are entitled to 15% higher dividends than those declared on Class B shares (currently A shares are paid $0.0615/quarter while B shares are paid $0.0535/quarter). However, Class B shares have the preferential right to be subject to a takeover bid without the Class A shares having participation rights. The history of the Class B shares is quite interesting but in present-day, 49.8% is owned by a corporation called Peller Family Enterprises Inc., 24.8% by John Peller, and CDS Clearing (essentially the public portion of the trading float seen on the TSX) holding another 21% of the shares. The remaining 4.4% are held by various other private individuals.

The majority of voting stock used to be held by Joseph Peller through his majority-owned corporation, but has subsequently devolved into the current structure – while the Peller family still collectively owns the voting interest in the corporation, there are different entities in the family having control elements. In particular, Jeff Peller died in 2021 and for estate management reasons, the company had to sell Class A shares in 2022 (definitely did not help the stock price at this time) – SEDI filings suggest this was executed October 2022 at about $5.60/share. Long story short – the Pellers (via the family corp and John) still have about 75% of the voting stake in the company.

A pivotal moment was when, in November 9, 2023, management announced that there would be a transition and the then-CEO, John Peller, would be retiring:

John Peller announced his intention to retire as President and Chief Executive Officer of the Company within the next year. The APL board of directors (the “Board”) is engaged in a process, together with its outside organizational consultants and a leading executive search firm, to find a suitable successor for the CEO position.

For almost 30 years, John Peller has led APL as Chief Executive Officer and been the driving force behind the Company’s growth and success. The Board is seeking to identify and attract a CEO who will respect APL’s core values and will continue the rich traditions that have been ingrained in the Company due to the contributions, efforts and commitment of the Peller family.

In addition, the Company’s independent directors, Perry Miele, Shauneen Bruder, François Vimard and David Mongeau, have announced that they will be retiring effective immediately, to support a proactive refreshment of the Board. The Company intends to add independent directors to the Board within the next few weeks. The identity and details regarding the new Board members will be announced at that time.

We see a public post from Miller Thomson (legal firm) that advised Peller Family Enterprises on this transition. The company has kindly paid $3 million in professional advice to assist with the family corporation.

On February 9, 2024, five directors were announced to the board and the following:

As part of John Peller’s retirement and transition, the Company has agreed to pay $4.5 million in a retirement allowance in addition to his ongoing salary as President and CEO until a successor is appointed. In addition, the Company has also entered into a consulting agreement with John that will take effect upon his retirement to ensure a smooth transition, which provides for a $2.0 million consulting fee for services provided, paid quarterly.

The Company has entered into a transition agreement with Peller Family Enterprises Inc. and the Peller family, which includes provisions relating to the composition of the Board for a 24-month period, as well as standstill and other provisions. Later (see below) it was disclosed that the Company has paid $3.0 million in legal and advisory fees incurred by the shareholders in connection with these agreements.

Finally, on July 9, 2024 it was announced that a couple internal hires would lead the company as CEO and President, and John Peller stepped away as CEO. Later that year (September 17, 2024) announced were some other hirings and firings. However, what got my attention was on November 6, 2024’s quarterly report results, the following sentence was included:

In response to these margin pressures, the Company has executed numerous production efficiency and cost savings programs including the renegotiation of inbound and outbound freight rates and alternate sourcing for glass bottles.

One of the problems with having family-run enterprises is that management can get quite entrenched in old ways and become stagnant. Another problem is that they treat the family business as their own personal spending conduit to the detriment of the non-controlling shareholders. They might surround themselves with staff that are too afraid to rock the boat or suggest changes to long-held methods of doing business that have long since been outdated (perhaps I should take hint at my own words here). By getting new (hopefully competent) eyes to look at business practices, it may lead to better results. Definitely something such as looking for cheaper sources of glass bottles would be low-lying fruit?

On February 12, 2025, John and Angus Peller stepped away from the Board of Directors, completing the transition.

From November 2024 onwards, I made the decision to take a stake in the company, both the voting and non-voting stock. Having really lost my mind on Teck Resource’s reclassification of their super-voting shares (where their voting stock received a 60% premium in their Class B stock and I remember on my trading screen during the depths of the Covid panic looking at the A and B shares and deciding to save a buck and go with the Bs – a mistake that regret), I was very intent on obtaining voting shares of the company. The non-voting stock was easy enough to accumulate, but the voting stock was a real pain in the ass to transact. It is incredibly illiquid with some days featuring zero trades and very high bid-ask spreads. Since November 6, 2024, there have been 94,000 shares trading in this class of stock on the TSX. The premium one pays for the voting stock is typically a dollar over the non-voting stock price, but over the past week this equilibrium has broken – somebody has really wanted to accumulate the B stock and it doesn’t take a lot of dollar volume to inflate the price! I have managed to take a reasonable chunk of the historical trading volume but now that the premium to non-voting is so high, I can reveal this trade which has taken 10 months to perform. I’m no longer in the market for the B shares at present pricing.

My investment thesis here is fairly simple:

1. The company still has the Peller family with control and I am presuming they have an incentive to ensuring that it is being managed with an eye to continuing the dividend stream (providing cash flows to the family) and that their main priority is to capture cash flow – John Peller still controls about 5.1 million shares of Class A stock in addition to the voting stock;
2. The company operates in a stable and very mature industry and should exhibit a small amount of incremental improvement in results;
3. The company is a stealth play on the ownership of agricultural land which should retain value in most economic climates;
4. The non-trivially sized development property in Port Moody which will eventually be disposed of; this continues the theme of new management in Q1-2026 announcing the disposition of “non-core” assets:

During the first quarter of fiscal 2026, as part of its strategy to divest non-core assets, the Company initiated the proceedings to sell land, vineyard, and building assets in Kaleden, British Columbia with a net book value of $977. The sale closed in the second quarter of the fiscal year for proceeds of $1,260.

… it should be noted the BC Assessment value of the Port Moody property is $50,800,000 land value for one parcel (there are other parcels in the vicinity which will add to this value).

5. There is a chance the stock structure will be flattened, Teck-style. From the 2024 November quarterly conference call:

————–

Operator
Your next question comes from [ Dave Boychuk ] shareholder.

Unknown Shareholder
I was at the AGM in September, and this is actually just a clarification question because somebody in the — somebody at that meeting asked the question about the current, I guess,

    the current shares of the A and B value

. And I forget which one of you guys answered back something that you were working with somebody or some firm or something. And I just wanted clarification what that was.

Paul Dubkowski
To be honest, I’m actually don’t recall that or mention anything around that. I don’t think that’s something we would speak about at an AGM nor do I have anything to report on that. But I’d be happy to — if there’s something specific, I’d be happy to take a call on it. But no, nothing to report, and I don’t recall speaking about that.

————–

… after the 24 month “stand-still” provision with regards to the board composition is expired, there is a decent chance that there will be some “make whole” arrangement that will invoke a single class of shareholder and compensate the voting shareholders, similar to Teck. This will align with the Peller family receiving cash flows and a still significant control (although far from majority control) of the company. This would likely make the company more attractive for public investment.

6. The financial metrics are relatively cheap when compared to similar participants. The closest comparison is to Corby Spirits and Wines (CSW.A/CSW.B) and although their business is somewhat different, it makes ADW look relatively cheap. Another comparable is Lassonde (LAS.A) but they have been performing shockingly well over the past decade.

At my purchase price, the downside appears to be quite limited and getting paid 5% to wait seems to be a good proposition. Despite the increase in the share value over the past 10 months, the overall firm appears to be relatively cheap. For the better part of the last decade, the company’s stock traded in the double digits and there is a reasonable possibility over time they will see this again.

Long both ADW.a and ADW.b – and a liquidity disclosure – ADW.b is incredibly difficult to trade efficiently. I’ve learned a lot about trading very illiquid stock and needless to say, I won’t be exiting it anytime soon, even if I wanted to!

NVidia Q2-2025

I am only making a comment on the raw magnitude of money they are making and making some simple calculations with it.

For the quarter, $46.7 billion in revenues. Gross margin of 72%. Bottom-line after-tax figure of $26.4 billion.

The half-year figures look “worse”, with 67% gross margins and a $45.2 billion bottom-line, but man, that’s still a crazy ton of money they are making.

Let’s take the quarter that has just passed and multiply by 4. I know these figures are projected to grow (for how long?) but let’s just play with the past quarter and extrapolate.

The last quarter times 4 is $106 billion a year in income annualized, or $4.31 per diluted share.

NVidia closed trading at $181.60 per share, giving it a P/E of 42.

What’s funny is there are some other well established companies that are even more expensive when using this simple metric.

Costco, for example, is trading at a P/E of 55. One isn’t going to accuse Costco of having their customers wanting to build trillions of dollars of factories to sell product in Costco’s warehouses, or having 70% gross margins for that matter!

However, let’s go back to NVidia.

If I was a serious long-term investor (not too many of those left these days), the biggest concern of mine would be on the cash flow statement.

In the first half of the fiscal year (start of February to end of July) they generated $42.8 billion in cash through operations. This is less than the net income primarily due to increases in AR and inventories – this is logical considering their revenues are skyrocketing.

However, the biggest concern I would have is the $23.8 billion they blew out the door in stock repurchases and the additional $3.4 billion paid out in taxes relating to option exercises.

What did shareholders get for $23.8 billion going out into the equity markets? In Q4-2024, NVDA had 24.489 billion weighted shares outstanding (basic), while in Q2-2025 they had 24.366 billion, a reduction of 123 million shares or 0.5% of shares outstanding. Percentage-wise it is a drop in the bucket, but because we are dealing with huge numbers, $23.8 billion dollars could have gone in many other places! Perhaps they could buy 20% of Intel along with the US Government……

Needless to say, a lot of hidden compensation is going out the window in equity. While employees and executives are getting very rich (if you have some and haven’t diversified yet, might be a good time to consider it!), shareholders will eventually be paying for this somewhat more hidden compensation. It is a repeat of the dot-com era stock option craze – the public investors have done well, but the buyback is a serious cash drag on the company.

The MEG sweepstakes, revisited

You know you’re starting to get old when you consistently start reciting your own work from years on back.

Does anybody remember Husky Energy (now consumed by Cenovus Energy) tried to take out MEG Energy at $11/share in 2018?

Subsequent to this, I wrote about MEG’s pending takeover in May and December of 2021 where I speculated that Cenovus was the most likely strategic acquirer of MEG Energy. There are significant synergies with the acquisition, including geographical ones (Cenovus and MEG Energy are side-by-side at Christina Lake, Alberta):

(MEG is on the north-eastern end of the lake, CVE is on the southern and northern end, and CNQ is on the southwestern end)

For those unaware, these oil sand assets are the crème de la crème of the Alberta oil sands – they have the best steam-to-oil ratios out of all the oil sands. As most of the capital has already been spent on the projects, they will be generating cash flows for decades. It cannot be understated how valuable this asset is whether oil is trading at 50, 75 or 100 a barrel – they are the lowest cost production fields in North America.

Indeed, I wrote those articles when MEG was $12/share and my very pithy analysis speculated that one of CVE or CNQ would just do a 30-40% premium buyout and get it over with. This would have been about $17/share equivalent. The only element that has changed since then (the commodity price environment round-tripped after the Russian invasion of Ukraine, and when adjusting for Canadian currency and the narrower WCS differential the price is virtually the same today as it was back then) is the price being paid – roughly speaking, $5.2 billion in cash and 84 million shares of CVE for a grand total of about $7.2 billion at today’s market value of CVE or about $28/share for MEG.

This is a very unusual transaction considering that Strathcona’s offer was originally higher than Cenovus’ offer, but the even more shocking factor to me is that Cenovus is trading higher after delivering a lower bid than Stratcona, which MEG agreed to!

I wasn’t expecting this set of circumstances to be on my bingo card.

When running my paper napkin calculations, it will be a synergistic acquisition. Just looking at an apples-to-apples comparison in 2024, CVE trades at 11x EV/FCF, while MEG trades at 10x – this is using the currently elevated share prices at August 27, 2025.

There are other synergies – there are plenty of greenfields in the MEG geographical footprint to facilitate the maintenance of their SAGD projects, TMX allocation, and tax shield assets which will deliver quite a bit more cash flow to the underlying Cenovus entity (not to mention the cost elimination of a management layer). The CVE cash portion will be funded by low cost (and tax deductible) debt and the leverage situation after the acquisition is still modest. Finally, MEG in the end of 2024, in an attempt to appear relevant, announced they would spend about half a billion dollars in what they titled a “Facility Expansion Project”, adding 25,000 boe/d of production in a few years – presumptively this project will be canned as half a billion dollars is one hell of an opportunity cost when you have a limited geographical footprint like MEG did (not to mention egress issues).

Strathcona will also get a tactical victory by virtue of its short-term investment in MEG paying off, but strategically they are still looking for ways to tap into the very valuable market of having enough of a stock float to be picked up by index ETF investors – I am absolutely sure they will be on the prowl in the oil patch to boost their own liquidity. At this point the only other obvious target that is publicly traded is Athabaska Oil Sands (TSX: ATH), but they’ve received too much of a bid recently in anticipation of exactly that.

What is ahead in the Canadian fossil fuel industry?

From a broad strategic perspective, the next logical merger would be Cenovus and Suncor. The major synergy here is with the refining networks both companies have – internal consumption of your own product hedges against the inevitable egress risk that will be coming up later this decade. Irvine, Valero, Shell and Imperial Oil would still be primary competitors in the refining space.