Sea ice in the Canada Basin of the Arctic Ocean has decreased significantly in recent years, and this will likely change the properties of the surface waters. A near‐surface temperature maximum (NSTM) at typical depths of 25–35 m has been previously described; however, its formation mechanisms, seasonal evolution, and interannual variability have not been established. Based on summertime conductivity, temperature, and depth surveys and year‐round Ice‐Tethered Profiler data from 2005 to 2008, we found that the NSTM forms when sufficient solar radiation warms the upper ocean. A seasonal halocline forms in summer once enough sea ice melt has accumulated to separate the surface mixed layer from the NSTM. The NSTM becomes trapped below the summer halocline, thereby storing heat from solar radiation. This heat can be stored year‐round in the Canada Basin if the halocline is strong enough to persist through winter. In addition, energy from storm‐driven mixing can weaken the summer halocline and entrain the NSTM, thereby melting sea ice in winter. Throughout this cycle, Ekman pumping within the convergent Beaufort Gyre acts to deepen the NSTM. From 1993 through 2007, the NSTM warmed and expanded northward and both the NSTM and the summer halocline formed at successively shallower depths. North of 75°N, the temperature of the NSTM increased from 2004 to 2007 by 0.13°C/yr, and the NSTM and summer halocline shoaled by 2.1 m/yr and 1.7 m/yr, respectively, from 1997 to 2007. The formation and dynamics of the NSTM are manifestations of both the ice‐albedo feedback effect and changes to the freshwater cycle in the Canada Basin.