Kapuskasing, like most northern communities, began with the development of the National Transcontinental Railway. The camp, established on the banks of the Kapuskasing River by the railroad company, grew into a settlement known as MacPherson. In 1917, the name of MacPherson changed to Kapuskasing, as it remains today. Kapuskasing means "Bend in the river" in Cree.

During World War I, the Canadian government looked to build an internment camp for enemy aliens residing within the country. Kapuskasing's remoteness provided an ideal solution. Eventually enemy soldiers, captured in battle, were also sent to Kapuskasing for imprisonment. A small cemetery about 2 kilometres west of the town marks the original location of the internment camp.

After the war, the Canadian government needed to maintain the development of Northern Ontario by increasing its population. In order to do so, the government offered 100 acres of land to any family willing to settle up north.

It is during this period that people began realizing the value of the abundant stands of black spruce in the area. In 1920, the Spruce Falls Power and Paper Company Ltd. opened its doors in Kapuskasing. Spruce Falls brought much wealth and comfort to the inhabitants, who gradually abandoned farming and took up work at the mill or in the many logging camps. In 1991, the newsprint manufacturing mill became an employee-owned company. Tembec Inc. acquired all of the company shares in 1997. Since its establishment, the pulp and paper mill has played a major role in the development of the community.