In Iceland, elves are said to inhabit rocks and hills. In Gimli, they reside in the attic of the town's municipal building. Legend has it the elves (also called huldafolk or hidden people) hopped aboard with the first group of Icelandic settlers who arrived in Manitoba in 1875. At first, they lived on the top floor of the H.P. Tergesen store, then they moved to an elementary school which is now Gimli's town hall.

The 89-year-old building recently underwent a major restoration -- though oddly no one bothered to replace a brick missing from just below the attic window.

"I went to Grade 8 here," recalls Tammy Axelsson, executive director of the New Iceland Heritage Museum in Gimli, who accompanies me to the town hall. "When that brick fell out they panicked and said it was unsafe and moved all the kids to the high school because of one brick. Nothing ever fell out of it again."

Maybe it was the huldafolk.

"It was the huldafolk undoubtedly," Axelsson says.

Gimli's hidden people are known as Snorri and Snaebjorn, often portrayed as two smiling dwarves with tall floppy hats. To get to their home, first locate the art gallery on the second floor, then look for the door that leads to a narrow spiral staircase which takes you to the Huldafolk Attic. Note the sign above the entrance: "Adults allowed to visit only if accompanied by children." There are no kids in sight, so we ignore the sign and go up anyway.

In the darkened room are two identical elf-sized beds (about a metre long), a bookcase hidden behind a secret wall, and a small window which looks out onto the street.

But there's no sign of the occupants. The only one up here is Leo Kristjanson, one of the few people who claims to have encountered Gimli's huldafolk.

His wife Jean, whom I'd met in the art gallery, recalled the day her husband reported the elf sightings.

"I told him, 'Half the town already thinks you're crazy and the other half knows you're crazy.'"

Regardless of her views, Jean now sews Snorri and Snaebjorn dolls and sells them to raise money for charity.

Few people ever encounter the huldafolk. Some, like Tammy Axelsson insist "you can only see them if you believe." Others say the elves decide when and where they will be seen by humans.

The next time we see the mischievous elves is in a mural, one of many paintings of local scenes along the harbour wall. There's also a children's book -- The Gimli Huldafolk -- available in Tergesen's department store, where the two elves found their first home.

Described by a Winnipeg visitor as one of Manitoba's secret gems, the H.P. Tergesen store has been in the same family for more than 100 years. Its cash registers, hardwood floors and tin ceilings are all original.

"We still handwrite our bills because of the provincial heritage status of our store," says Lorna Tergesen, who is also a volunteer editor of the Icelandic Canadian Magazine.

Manitoba has the largest community of Icelandic descendants outside of Iceland, and many of them, like Lorna, make their home in Gimli.

Gimli is known for its annual Icelandic festival in August. But besides that, there's also a pristine sandy beach and the excellent New Iceland Heritage Museum. Here you can watch a 10-minute film, see a replica of an early cabin and the original books and trunks with slanted handles that settlers brought with them.

One historical panel explains that Gimli, before it joined the province in 1881, was known as New Iceland, with its own laws, schools and social structures.

Near the museum in the Waterfront Centre, is the newly opened Amma's Tearoom and Gift Shop, where a tasty lunch is assured, including some Icelandic desserts such as pancake-like ponnukokur, and a layer cake with prunes, cardamom and almond icing called vinaterta.