In 1879, he became the de facto governor of the District of Rainy River, holding executive, judicial and magisterial power over the new settlements situated west of Ontario.

Lyon operated a number of businesses in Milton, including an extensive general store selling dry goods, groceries and hardware, and oversaw the erection of a new gristmill with Edward Martin (father of Joseph) in 1856, replacing its fire-damaged predecessor.

[4] In 1866, William and Robert moved to Manitoulin Island where they erected a sawmill, set up a mercantile and lumbering business and established a settlement in Michael's Bay.

In 1871, the Liberal Party dropped the local MPP William Barber as their candidate in the upcoming election, due to his support for Premier J. Sandfield Macdonald's self-described "Patent Combination" government.

[10] His confident performances in and outside the Provincial Parliament led John Henry Pope to write in 1877: He has always taken a decided stand on the Reform side of politics, is a ready speaker, has an extensive knowledge of public affairs, and is gifted with a large share of common sense.

In the following month, acting on the advice of his Premier, the Lieutenant Governor appointed Lyon to Thunder Bay West, requiring him to resign his parliamentary seat and not contest the upcoming election.

Such was the mutual respect, between himself and the chiefs, that Lyon was able to attend a tribal meeting to face down the young warriors who had encouraged killing the white settlers and joining the North-West Rebellion.

The power struggle between federal and provincial government had worsened since Lyon's arrival in the district, as Premier Oliver Mowat faced opposition from Prime Minister John A. Macdonald and his Conservative ministry.

[22] The subsequent provincial conflict threw the administration of the Rainy River District into disarray, with Rat Portage at the centre of a crisis in which Ontarian and Manitoban officials sought to take control whilst the Dominion continued to lay claim to its own authority.

[23] After two years of political uncertainty and dispute in the town, the Manitoban Attorney-General James A. Miller (also MLA for Rat Portage in the Legislative Assembly of Manitoba) agreed with Oliver Mowat that the issue should be brought before the Judicial Committee of the Privy Council.