So how does the parser handle this case?

The parser would parse the first line %%time as a cell magic statement and the second line as an assignment statement.

This is technically a bug in the parser as both lines should be a single node instead but as we always ignored cell magic, it never came up.

Where does the cell magic end? Does it just include the %%time regardless of what follows? Like how would the parser deal with:

%%time x = 1
y = x

Each statement is a single node, so %%time x = 1 would a single node and y = x would be an assignment statement. This code would raise undefined name for x. This is intentional as that requires support for inline parsing which might require more thinking.

I'm mostly wondering how the parser knows where the magic statement ends.

Oh, it's the newline. The lexer consumes everything till the newline and considers this as part of the command.

Ah okay, makes sense. Could there be continuations though?

Yeah, but that is ignored. So,

%%time \
	x = 1
y = x

will parse in same way as your example.