Pleistocene climate cycles and glaciations had profound impacts on taxon diversification in the Boreal Forest Biome. Using population genetic analyses with multilocus data we examined diversification, isolation, and hybridization in two sibling species of tree squirrels (Tamiasciurus douglasii and T. hudsonicus) with special attention to the geographically and genetically enigmatic population of T. hudsonicus on Vancouver Island, Canada. The two species differentiated only about 500,000 years ago, in the late Pleistocene. The island population is phylogenetically nested within T. hudsonicus according to our nuclear analysis but within T. douglasii according to mtDNA. This conflict is more likely due to historical hybridization than to incomplete lineage sorting, and it appears that bidirectional gene flow occurred between the island population and both species on the mainland. This interpretation of our genetic analyses is consistent with our bioclimatic modeling, which demonstrates that both species were able to occupy this region throughout the late Pleistocene. The divergence of the island population 40,000 years ago suggests that tree squirrels persisted in a refugium on Vancouver Island at the Last Glacial Maximum, 20,000 years ago. Our observations demonstrate how Pleistocene climate change and habitat shifts have created incipient divergence in the presence of gene flow.