Montreal Coke and Manufacturing Co. v. MNR, [1944] A.C. 126, [1944] CTC 94, [1944] UKPC 11 (P.C.)

Expenses incurred by the taxpayers in redeeming outstanding bonds before maturity and reborrowing at lower rates of interest, including redemption premiums, underwriter discounts and legal and printing expenses, were not "disbursements or expenses ... wholly, exclusively and necessarily laid out or expended for the purpose of earning the income" for purposes of s. 6(a) of the Income War Tax Act given that such expenditures were not directly related to the trading operations conducted by the taxpayers.

The taxpayers incurred various expenditures in connection with retiring existing bonds before maturity and issuing replacement bonds at a lower rate of interest and with less onerous conditions as to payment, including the payment of redemption premiums, disbursements on account of exchange, discounts paid to the underwriters on the issuance of the new bonds, and legal and printing expenses. These expenditures were found to be non-deductible by virtue of s. 6(a) of the Income War Tax Act, although Lord Macmillan indicated (at p. 135) that "their Lordships in no way dissent from the view" that their deduction also was prohibited by virtue of s. 6(b). It was found that "the financial re-adjustment of their borrowed capital was an isolated episode, unconnected with the day to day conduct of their businesses" and that "expenditure incurred in relation to the financing of their businesses is not, in their Lordships' opinion, expenditure incurred in the earning of their income within the statutory meaning."

In connection with the retirement of old bonds and the issuance of replacement bonds, the taxpayer had to pay interest on both the old bonds and the new bonds for an overlapping period. Lord Macmillan held (at p. 134) that "the overlapping interest was paid as part of the cost of the refunding operations and on money borrowed temporarily in excess of what was required for the purposes of the businesses during the overlapping period, and was thus properly disallowed by the Minister" under s. 5(b) of the Income War Tax Act.