Magrath was established in 1899 by settlers sent by The Church of Jesus Christ of Latter-day Saints from Utah and Idaho. These Mormon settlers were recruited by the Alberta Railway and Irrigation Company to construct irrigation works in the areas. The settlers were paid cash and land in the town. This was the first major irrigation work in Canada and was made possible by the settlers' experience withe the extensive irrigation projects undertaken by their church in Utah and Idaho.

Magrath began as a small farming community, and although it continues to service the surrounding farming population it has quietly changed into more of a bedroom community for the neighbouring city of Lethbridge and to a lesser extent the town of Cardston. It was known early on for its irrigation canal system which supplied water to local farmers. At the time, the canal system was state-of-the-art and was a huge undertaking.

Magrath was named after Charles Alexander Magrath. Magrath post office was established March 1st, 1900, with Ammon Mercer as first postmaster.