The Town of Espanola originated as a company-owned town. In 1899 the Ontario government signed the Espanola Agreement with the Spanish River Pulp and Paper Company, which gave the company the authority to begin logging operations over a 5,600 km area for the next 21 years. Under the agreement, a pulp mill capable of employing 250 people was to be constructed. A company-owned town site was established which stretched from the Spanish River to where Second Street is today.
In 1903 construction began on houses within the company-owned town site of Espanola.
In 1911 construction began on the Manitoulin and North Shore Railways. As a result of this, a number of construction workers began to settle in the area just south of the company town site (south of Second Street). This area was known as Frenchtown or Espanola South.
Following World War I, an improved economy resulted in the expansion of the paper mill and an influx of new people. Two new schools and a community centre were built. The mill now employed almost 700 people. Unfortunately, this economic boom was short-lived and by 1924 the pulp and paper industry had become somewhat depressed, resulting in a number of people leaving town. In 1928 the Abitibi Power and Paper Company merged with the Spanish River Pulp and Paper Mills Company. Abitibi had overextended its finances and was forced to begin laying off employees. On December 31, 1929 the Espanola mill was closed permanently. A small maintenance crew was kept on to provide public utility services to the town site. The company provided food, fuel and other necessities until relief payments from the provincial government replaced this. Since Espanola was at this time a company town, when the mill ceased functioning, the town also stopped functioning. Some people left the town, but a number of people remained realizing that the possibility of employment elsewhere was also limited. Many of the residents in Espanola South also remained since many of these houses were owned and it was impossible to sell them, whereas the houses in the company town site were all leased. In total there were 1,925 residents living in the company town site and Espanola South.
During World War II, Espanola became the site of a prisoner-of-war camp for German soldiers. The war prisoners were housed in the old mill buildings and the Guards assigned to watch over them moved into some of the abandoned houses in the company town site. A map of the world, drawn by one of the German prisoners-of-war, is still visible on one of the mill's walls today. In 1943, the Kalamazoo Vegetable Parchment Company of Michigan purchased both the mill and the company town site and restarted the mill operations. A Canadian subsidiary company, the KVP Company, was formed to handle the Espanola mill operations. By the mid-1940's both the mill and the town were in need of modernization and repairs. In 1946 the KVP Company established the Espanola Development Company as a wholly-owned, privately incorporated subsidiary to administer the town. This was an attempt to separate the town business from the business of the pulp and paper mill.
By the mid-1950's, a movement had begun in Espanola South to incorporate the Town of Espanola. Despite the freedom from Company controls and building codes that Espanola South had enjoyed, much of this area had been without water, sewers and had limited electrical supply since its origins. On March 1, 1958, Espanola was incorporated as a Town with a population of 5000.
Since its inception as a municipality, Espanola has continued to expand and improve itself as a community The pulp and paper mill, under the ownership of E.B. Eddy since 1969, and now Domtar Inc. has seen several large-scale capital investments in recent years, such as a new electrical generator and a new pulp bleaching process which eliminates the use of chlorine.
In 1988 a new Multi-Care Facility and hospital was constructed in the south end of Town.
In 1994 a new water tower was constructed in the community and in 1996 improvements were made to the quality of the town's drinking water with the construction of a new water treatment facility. In 1995 construction on a secondary sewage treatment facility was completed. The 1990's have also seen an increase in commercial development with the construction of several new retail stores at the south end of the town, across from the Espanola Mall. In 1999, the Espanola Regional Recreation Complex opened.
The 2000’s continued to witness an increase in commercial activity with the Espanola Mall reaching almost full capacity. Additionally, the town completed several improvements related to infrastructure, such as upgrading the water lines and the lift station and the development of new residential lots. In 2008, the development of a fully serviced Light Industrial park was completed. The year 2009 marked the establishment of a 22-foot high LED message board sign at the south end of town, used to promote community events.