Prefab creation confusion

I am following this tutorial and the first thing is to create a prefab as such:

However, when I create new prefab and drag my canvas object into it, I get

If I try adding the panel's children, it asks if I would like to replace them.

If I choose yes, then it replaces the contents

I cannot figure out how to get the whole tree in a prefab. No matter which object I drag into a prefab, only its children are included and none of its grandchildren.

What am I missing?