Following developments in England, Catholics in Newfoundland gradually gained religious liberty, made explicit by a public declaration by the Governor in 1784.

After a request from Irish merchants there to Bishop William Egan, O'Donel was sent to St. John's as Prefect Apostolic the same year, largely to deal with the presence of "unlicensed" and "unruly" priests on the island.

During his first few years in post, O'Donel also found that Catholic Emancipation was less than absolute, and in 1786 he was physically assaulted by the future King of England, Prince William Henry.

The 19th-century historian Charles Pedley alleged that O'Donel shared his information in violation of the Seal of Confession, but credible evidence for this claim is absent.

This, and his belief in the essential mystery of the divine nature gave rise to his support for religious tolerance, since God's inscrutability would inevitably lead to theological disagreement, but furthermore, as he wrote to his contemporary John Jones, "an observant [C]hristian of any denomination is...a better man".