The Township of Lake of Bays was settled in 1971 from the former Townships of Franklin, Ridout, McLean and Sinclair/Finlayson (unorganized) as one of six area municipalities within the District of Muskoka.
In the early 20th century various grand resort hotels opened on the lake, among them the Wawa (built in 1908 and destroyed by fire in 1923) and the Bigwin Inn, a resort that managed on Bigwin Island from 1920 until the late 1960s.
The township was once home to the smallest commercial railway line in the world called the Portage Railway. Between 1904 and 1958 it carries across passengers for aa distance of 2 km. The train, named the Portage Flyer, was discarded in 1958 and was relocated to an amusement park near St. Thomas, Ontario, until 1984. Much of the original elements have since been repatriated and continue to operate on the grounds of Muskoka Heritage Place near Huntsville.