This answer mentions Airbnb technically being illegal in New York and that causing issues sometimes with unprompted withdrawal of rentals.
Are they legal in Canada, and specifically Toronto?
There's an Airbud interpretation of laws that goes along the lines of "There's no rule that says a dog can't play football". Or in XKCD's interpretation:
There's a great Canadian article on it on Canada.com, where it comes down to being 'murky'. They point out the NYC rule, as well as when a landlord says you can't let your place out, or finds out you are and can kick you out. In the end one of their renters gave a quote which sums it up:
"To have a great experience, sometimes you have to take a chance," says Clarke. "Staying at a Marriott is like a bank account: low return, but your investment is safe. Airbnb is like a risky stock: Things can go wrong, but you can also win big."
Of course, that's as a guest.
Fortunately, if you're a guest, you're probably not the one in hot water if it isn't allowed. It'd be like a regular hotel forgetting to renew their license. However, consider...
As someone letting out their room, it depends if you own it. If you yourself are a renter, one would want to check your letting agreement with your landlord. Mine have had specific clauses saying guests staying longer than x days need to be verified, and no subletting is allowed. If you really wanted to be sure, check with your landlord as well. He's getting his rent, and as long as you're not wrecking, many would be ok with it. Some obviously won't, however.
And that's where the problem lies. IF they do get into trouble or it turns out to be banned by their lease, you may find yourself getting turfed out, or turn up in town only to find you have nowhere to stay.
However, the majority of people are reporting great experiences with it. I'll be using it when I visit Australia in November.
Update: I've now used it in Australia, New Zealand, Canada, USA and more, with zero problems.
It probably is dependant on the province and/or cities you wish to visit.
It is mostly legal (as it is not illegal), but city by-laws might regulate the number of days allowed for rentals and/or have the owner of the property really living in said property (prevent people from buying tons of properties to just do short term rentals.
For example Toronto is trying to pass by-laws in that regards.
In Québec (the province) there are regulations in that regards (afaik), but since there are so few inspectors, most people just do it.
On a more local scope, some boroughs in Montreal are taking steps to limit and reduce the number of available properties for short term rentals.
And now, more and more condo complex associations are trying to prevent short term rentals by not allowing rentals shorter than, for example, 6 months.