The former Arseanl trainnee was offered a one year deal at Town but failed to do enough to convince Royle to renew his contract.
He was loaned out to Hartlepool and was subject of a £75,000 bid by the Victoria Park club in January but it was turned down by the club.
McDonald, a player full of flair, will be plying his trade in League One next season, after signing for Gillingham on a free transfer.