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Possum Lake is a fictional town located somewhere in the Canadian province of Ontario (revealed through various means, including the license plates on most of the vehicles that appear on the show, along with the fact that most exterior scenes were filmed on location in the city of or in suburbs of or rural areas near Hamilton, Ontario; the hometown of Steve Smith, the show's creator and the portrayor of Red Green; and the location of the studio in which the show was taped for it's first two seasons), and is home to a lake by the same name, as well as to Possum Lodge and most of its members. While its size or population are never officially stated in The Red Green Show, it is implied that the town is a very small rural area neighboring the larger town of Port Asbestos.

The lake, whose shape is similar to that of a possum, is stated to be grossly polluted throughout the series: Many episodes mention how many vehicles and appliances are stuck at the bottom of the lake, while in one episode Harold informs Red that there are no fish in it. In another episode, Red tries to come up with a scheme to clean up the lake after Dalton receives an environmental report stating that the water is unsafe for human consumption. In Magnetic Lake, the lake is even magnetized, wreaking havoc on the local population and rendering the phone lines unusable.

The mayor of Possum Lake, Wally "Kickback" Kibler, is a renowned cheat. In The Mayor Race, Red and Harold both challenge Kibler, but Red bows out of the race once he learns that Harold is running. Later, after a stint in the city, Harold becomes the public relations director for Possum Lake, a job that pays him a $60,000 salary.

Several Red Green characters make their living directly on Possum Lake. Glen Brachston operates the marina for the first nine seasons, after which Dwight Cardiff takes over. (Both people are extremely lazy, and hardly anything ever gets done there.) Buzz Sherwood, the local bush pilot, parks his seaplane on the lake, and Hap Shaughnessy is the water taxi captain.

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