The town was originally incorporated under community status on April 12, 1995 through the amalgamation of the Town of Borden and the Community of Carleton. The town of Borden opted to demote its status to a community in light of a declining tax base with the pending completion of the Confederation Bridge and the closure of the Marine Atlantic ferry service. The community subsequently changed to town status on July 31, 2012.

Borden traces its history to Prince Edward Island's requirements for transportation to mainland North America whereas Carleton was a surrounding farming community to the north and west of the port.

Borden's development is related to the fall of fortunes for another nearby community during the First World War. A winter iceboat service crossed the Abegweit Passage between nearby Cape Traverse to Cape Tormentine, New Brunswick for many decades during the 19th century and early 20th century. The Prince Edward Island Railway built a line from its mainline near Emerald Junction to the Cape Traverse wharf to facilitate this traffic in the 1880s.

By the 20th century, the federal government began to face the reality of an unreliable winter iceboat service, which existed primarily due to the Dominion having failed to meet its obligation to provide "continuous steamship service" under the Prince Edward Island Terms of Union, when the province entered Confederation in 1873. As a result, the federal government announced in 1912 that it had commissioned the construction of a custom-designed railcar ferry, the SS Prince Edward Island at a shipyard in Newcastle upon Tyne, England.

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