Many plot‐scale studies have shown that snow‐cover dynamics in forest gaps are distinctly different from those in open and continuously forested areas, and forest gaps have the potential to alter the magnitude and timing of snowmelt. However, the watershed‐level impacts of canopy gap treatment on streamflows are largely unknown. Here, we present the first research that explicitly assesses the impact of canopy gaps on seasonal streamflows and particularly late‐season low flows at the watershed scale. To explicitly model forest–snow interactions in canopy gaps, we made major enhancements to a widely used distributed hydrologic model, distributed hydrology soil vegetation model, with a canopy gap component that represents physical processes of snowpack evolution in the forest gap separately from the surrounding forest on the subgrid scale (within a grid typically 10–150 m). The model predicted snow water equivalent using the enhanced distributed hydrology soil vegetation model showed good agreement (R2 > 0.9) with subhourly snow water equivalent measurements collected from open, forested, and canopy gap sites in Idaho, USA. Compared with the original model that does not account for interactions between gaps and surrounding forest, the enhanced model predicted notably later melt in small‐ to medium‐size canopy gaps (the ratio of gap radius (r) to canopy height (h) ≤ 1.2), and snow melt rates exhibited great sensitivity to changing gap size in medium‐size gaps (0.5 ≤ r/h ≤ 1.2). We demonstrated the watershed‐scale implications of canopy gaps on streamflow in the snow‐dominated Chiwawa watershed, WA, USA. With 24% of the watershed drainage area (about 446 km2) converted to gaps of 60 m diameter, the mean annual 7‐day low flow was increased by 19.4% (i.e., 0.37 m3/s), and the mean monthly 7‐day low flows were increased by 13.5% (i.e., 0.26 m3/s) to 40% (i.e., 1.76 m3/s) from late summer through fall. Lastly, in practical implementation of canopy gaps with the same total gap areas, a greater number of distributed small gaps can have greater potential for longer snow retention than a smaller number of large gaps.