Deciduous shrub encroachment in tundra ecosystems affects the soil microclimate and, in turn, could affect soil nutrients and microbial processes. Although numerous effects of shrubs on tundra ecosystem properties have been described, there has been little focus on the mechanisms through which they impact tundra functioning. In alpine tundra of northern Canada, we examined 1) the effects of the living shrub canopy and separated them from 2) the effects of increases in litter quantity and quality. In this 4-year study we experimentally manipulated shrub presence (shrub present or removed) and litter quantity (none, natural abundance, and 2x natural abundance) in a fully factorial design. Shrub presence affected soil temperatures by increasing winter and decreased summer soil surface temperatures by about 0.8 °C and 0.6 °C respectively, and also decreased mid-summer soil moisture. Shrub presence also affected both nutrient cycling and microbial processes including decreased summer available nitrogen (N), increased N-immobilization, increased microbial biomass as well as variable effects on potential exoenzyme activity. Increased litter inputs had few significant effects on tundra ecosystems, although additional litter increased both soil C:N ratios and microbial biomass. Our results indicate that shrub encroachment is likely to affect tundra soil properties primarily through mechanisms associated with the presence of the living shrub rather than from the accompanied changing litter quality and quantity. Because of opposing effects of shrubs between seasons and years, we encourage an increased focus on the mechanisms through which shrubs may affect tundra ecosystem functions and year round assessments of these processes.