The taxpayer required further funds for the expansion of its hotel, which the existing first mortgagee was unwilling to provide. The taxpayer borrowed funds from another lender sufficient in amount to discharge the existing first mortgage loan and finance the expansion. The existing first mortgagee required the payment to it of a premium or bonus (equivalent to six months' interest) in order to give its consent to the prepayment of the existing first mortgage loan.
In finding that the premium or bonus was not paid in the course of borrowing the replacement financing (which was found to be for an income-producing purpose) Cattanach J. stated (page 6145):
"The payment was not made in the course of borrowing money from the first lender but it was made in the course of repaying that money. This being so it follows that the payment to the first lender cannot be construed as an expense incurred by the appellant in the course of borrowing money from the second lender."