Depending on what you did with the tax code, that might or might not be a way to accomplish your goal. Let me illustrate the method described in the Guide.
First, I create a custom tax code with two components for your federal and provincial tax:
Then I create a sales invoice with your example figures, applying the custom tax code to it. I offer a 2% discount if paid within 10 days. The Edit screen:
and the View screen:
The problem with that, as you experienced, is that the discount is calculated on the full amount, including tax, just as the Guide says it will be. That is because Manager assumes an early payment discount—if it occurs—is a price reduction (again, as the Guide stipulates) and will be subject to a reduction in tax due. For the sake of illustration, let’s follow that scenario through to its conclusion.
The customer pays early, so I enter a receipt for $1960.56 using the New Receipt button on the View screen of the sales invoice. Manager recognizes that the receipt qualifies for the early payment discount and applies it. The sales invoice now looks like this:
More importantly, the Summary page looks like this. Note the Tax payable and Inventory - sales figures. Also note that Accounts receivable has not taken the discount into consideration:
Now I follow the prompt for the early payment discount and issue the credit note. The sales invoice balance remains at zero, but because of the credit note rather than the early payment discount:
Accounts receivable has gone to zero, as expected. However, since I did not remove the tax code on the credit note, my Tax payable account has declined. But so has the Inventory - sales account. Remember, the discount was treated like a price reduction:
At this point, I would be happy, but the tax authority would not. If I had deleted the tax code on the credit note, the sales invoice would be unchanged, but the entire $40.01 amount of the credit note would have gone to an income reduction. None would have reduced my tax bill:
What have I just done? I’ve paid my customer’s tax out of my own profit. The tax authority is happy. My customer is happy. But I am not. What can I do in the future? There are two options:
Reduce the discount percentage to account for the tax. The revised percentage would be 2/1.14975) = 1.7395. And the revised invoice would show:
Manually calculate the discount amount as you have been doing.
Both methods offer the $34.80 discount you intended. But in either case, it is important for compliance with your tax law that you delete the tax code on the credit note. If you don’t, the credit note will reduce your tax due and bring the tax authority down on your head. This is what I was referring to at the beginning, when I said your approach might or might not be a way of accomplishing your goal.
Ultimately, the exact method you choose will depend partly on how much you want to explain to your customer about Canadian tax laws regarding early payment discounts.