Your confusion arises from the fact that there are TWO definitions for "Mortgage Interest Differential" and they are entirely different!
1) The one mentioned in the IRP Directive is where you move from one location to another and you end up with a new mortgage rate (be it completely new or a blended one) that is higher than your old mortgage rate. There is some compensation available to help lessen the blow. This benefit has NOTHING to do with penalties and is not compensation for any kind of fee charged by the bank. In my experience, this benefit doesn't get paid out very often, especially in recent years where interest rates have been falling. The term "Mortgage Interest Differential" was written into CF regulations many years ago, long before the banks started using it.
2) When interest rates started plummeting in the 1990s, the banks starting referring to "Mortgage Interest Differentials" and their definition is quite different from the one talked about in the IRP Directive. The problem arises from the fact that the banks never discussed their terminology with us (damned inconsiderate if you ask me ;D). The banks' definition of a "Mortgage Interest Differential" is a fee that the bank charges in order to compensate itself for interest they stand to lose when you break your mortgage early. It's not a penalty, but I'm not going to go into a lengthy explanation on it either (it's late and I'm camping with a bad WiFi connection). The banks will also sometimes refer to it as a "Mortgage Interest Paydown."
In all likelihood, the original poster is faced with a situation where definition #2 applies. In this case, porting the mortgage makes it all go away. In fact, you have to have a pretty darned good reason for not porting the mortgage nowadays (the regulations are about to be tightened up and clarification is going to be issued soon) and "because I can get a better interest rate on a new mortgage" is not considered a good enough reason. If you think it is to your financial advantage to terminate your old mortgage and get a new one at the new location, you had better take into account that you could be left on the hook for any penalties, paydowns or differentials that are then payable to the bank.
In summary, definition #2 is the one that most likely applies in most situations today and everyone should expect to pay this charge out of their own pocket if they choose not to port their mortgage (does not apply in cases where mortgage are not portable). Definition #1 will only come into play when interest rates start to rise again.