Canistota was established October 22, 1883 when the Chicago Northwestern Railroad chose the sight. The original plat included twenty-two blocks, and was bordered on the north by Clay Street (now known as Willow Street); and on the south by Oak Street, which still bears the same name, and extends west along the half section line to mile line road one-half mile west of Canistota. The west edge of the original plat was bordered by 6th Street, which at that time extended across the whole west edge of town. Railroad Street was the east border. Other streets running east and west, from north to south were Wood Street, Elm Street, Free Avenue (Main Street), and Pine Street, all of which remain the same. The town was incorporated in 1900.

Canistota became the name of the new town somewhat by mistake. Major Free, a man connected with the Chicago Northwestern Railroad, named the town Canastota after his hometown, Canastota, New York. A clerical error was made when applying for a post office and the post office recorded the name as Canistota. The railroad continued call the town Canastota and the difference remained until July 28, 1919. Postmaster J.A. Beaner officially changed the name to Canistota.