In 1784, Britain split the colony of Nova Scotia into three separate colonies: New Brunswick, Cape Breton Island, and present-day peninsular Nova Scotia, in addition to the adjacent colonies of St. John's Island (renamed Prince Edward Island in 1798) and Newfoundland. The colony of Cape Breton Island had its capital at Sydney on its namesake harbour fronting on Spanish Bay and the Cabot Strait. Its first Lieutenant-Governor was Joseph Frederick Wallet DesBarres (1784–1787) and his successor was William Macarmick (1787). From 1799 to 1807, the military commandant was John Despard , brother of Edward.
Known as "Île Royale" to the French, the island also saw active settlement by France. After the French ceded their colonies on Newfoundland and the Acadian mainland to the British by the Treaty of Utrecht in 1713, the French relocated the population of Plaisance, Newfoundland, to Île Royale and the French garrison was established in the central eastern part at Sainte Anne.
Cape Breton Island's first residents were probably Archaic maritime natives, ancestors of the Mi'kmaq, the people who were inhabiting the island at the time of European discovery. John Cabot reportedly visited the island in 1497, becoming the first Renaissance European explorer to visit present-day Canada. However, historians are unclear as to whether Cabot first visited Newfoundland or Cape Breton Island. This discovery is commemorated by Cape Breton's Cabot Trail, and by the Cabot's Landing Historic Site & Provincial Park, located near the village of Dingwall.
In about 1521–22, the Portuguese under João Álvares Fagundes established a fishing colony on the island. As many as two hundred settlers lived in a village, the name of which is not known, located according to some historians at what is now present day Ingonish on the island's northeastern peninsula. The fate of this Portuguese colony is unknown, but it is mentioned as late as 1570.
During the Anglo-French War (1627–1629) of 1627 to 1629, under Charles I, by 1629 the Kirkes took Quebec City; Sir James Stewart of Killeith, Lord Ochiltree planted a colony on Cape Breton Island at Baleine, Nova Scotia; and Alexander’s son, William Alexander, 1st Earl of Stirling, established the first incarnation of "New Scotland" at Port Royal. This set of Scottish triumphs which left Cape Sable as the only major French holding in North America was not destined to last. Charles I’s haste to make peace with France on the terms most beneficial to him meant that the new North American gains would be bargained away in the Treaty of Saint-Germain-en-Laye (1632).
The French quickly defeated the Scottish at Baleine, and established the first permanent settlements on Île Royale: present day Englishtown (1629) and St. Peter's (1630). These settlements lasted almost continuously until Nicolas Denys left in 1659. Île Royale then remained vacant for more than fifty years, until the communities along with Louisbourg were established in 1713.