C-FYOW, I've done a little digging, and here's what I've found out:
In the late 1960's deHavilland Canada was beginning to develop the DHC-7 aircraft, roughly the same size as the Viscount but with very impressive short-field operating characteristics. At the time DHC was owned by Hawker Siddley, but project was also supported by the Canadian government, with subsidies beginning in the '67-68 fiscal year. Gradually, the government lost confidence in the either the ability or desire of the British parent to carry on with the project. And the idea of government involvement in the economy was much stronger in those days than they are now, so, in 1974 DHC was bought by the government. Thus DHC became a crown corporation. I just also wanted to note, on the Hawker-Siddley side of things, that the turmoil in the British aerospace industry, and their merger with BAC would also have been concerns at that time, so perhaps this partly explains their situation a bit.
Anyways, in 1970 there was also a report from the Science Council of Canada supporting the development of a Canadian STOL air transport system. At the time the major regional carriers as well as the national carriers were against the idea: they didn't want to fly the slower props, and this was prior to deregulation so the hub and spoke system and frequency based scheduling hadn't happened yet. At the time 737's and DC-9's were being used even on many smaller regional routes. It was, however, considered at the time that the view of the future would be towards larger aircraft, or supersonics, with more noise, and that airports for long-haul flights would be situated distant from downtown of any major centres. So the idea was to develop small STOLports close to downtown to provide convenient short-hop service. So with this vision in mind, and with the idea of selling DHC-7's, the government decided to work on a STOL program within Canada.
Initially it was decided that the STOLport concept could be tested using a prototype service as an experiment. In 1971 it was decided to operate a demonstration STOL service, but as the DHC-7 was still in development, it was decided to use another aircraft for the service. In June 1973, Airtransit Canada was created as a subsidiary of Air Canada to operate the experiment. From what I gather, however, Airtransit was set up to operate the service, but it was actually being operated FOR the government, who paid for it to be done (as it was considered an experiment, not a commercial venture, so in effect they were chartering the aircraft to fly the tests). Transport Canada was actually the owner of the six DHC-6 Twin Otters purchased for the operation, which were then leased to Airtransit. Flights were between Ottawa's Rockcliffe airport, and Montreal's Victoria Carpark (the former Expo-67 parking lot, named for it's proximity to the Victoria Pier). Flights began on July 24, 1974, and ended in April 1976. 157,700 passengers were carried on 23,895 flights for a load factor of 59.8% during the experiment (weekend flights were noted as bringing down the factor significantly). Airtransit was then disbanded, having only operated Twotters, and only flying Rockcliffe-Victoria Carpark. That is the end, I believe, of the history of Airtransit, but that leads into another issue...
Airtransit had only been the prototype service to test the STOLport concept. After the end of the experimental service, there was the question of actual indefinite commercial service. The idea had been to have STOLport service on all three sides of the Montreal-Toronto-Ottawa triangle, and under the regulation process then in effect, a license for a commercial carrier to operate a Dash-7 service between the three cities was set out for applicants. Four entities applied for the license (applications began in 1978), two were existing carriers, and two were new carriers proposed for the occasion. One was a group of investors proposing a startup, Canavia, one was a new enterprise to be called Dash-Air, one was proposed to be City Centre Airways (a proposed subsidiary of Great Lakes Airways), and the last applicant was Air Atonabee (which had changed it's name from the previous spelling Air Otonobee). Hearings on the license began in January 1980, and during these hearings various arguments were made for and against the proposed service and the carriers which wanted to operate it. In April 1980 Air Atonabee was granted authority to fly from Toronto Island to Ottawa International, but this was considered an extension of their existing service, and as they had no intention of using Dash-7's, this was considered merely a prelude to the real STOL license being awarded. However there was the facilties question. In Toronto the Mayor, John Sewell, was opposed to opening Toronto Island Airport to commercial traffic. In 1980 Sewell was defeated in an election by Arthur Eggleton, who had YTZ transferred to the Toronto Harbour Commission, but jet traffic was (and still is) not allowed into YTZ. The Victoria Carpark in Montreal had been abandoned since the experimental service ended, and it had no navigational aids or terminal facilities, and a Hydro-Quebec power line that had been built would have to be moved, and the airline winning the license would have to pay for part of it. And in Ottawa the airport at Uplands was considered close enough to downtown Ottawa, so the Rockcliffe idea was fading. The STOL license was granted to City Centre Airways fly Dash7's between YTZ, Rockliffe, and Victoria Carpark, but as a result of several factors Canavia and City Centre Airways decided to merge their applications. Financing fell through, however, and Great Lakes (by then changed to Air Ontario) pulled out, so Canavia decided to operate on the City Centre Airways name left by it's disappeared partner. By now, however, deregulation was being moved towards in Canada, so although licenses were still required to serve routes, the government did grant them more easily. Air Atonabee was allowed to begin Dorval-Toronto Island nonstop flights, and it changed it's name to City Express (similar, yet different from City Centre), and City Express decided to buy Dash7's. The City Centre Airways venture never seems to have materialized, even though it was designated to be the STOL carrier, but City Express seems to have snapped that market up starting in 1984 until it's demise and the consolidation of the Canadian airline industry in the late '80's.
The Dash7 wasn't as popular as had been hoped. It was certified in 1977. Things like levelling off of air travel demand, high fuel costs, airline economic problems, and high interest rates slowed sales in the '70's. It was also before deregulation and the hub-and-spoke era, and there was also the issue of the aspirations of regional carriers to operate jets like 737's. In 1984 the Dash8 entered service, and by December 1985, Boeing had bought DHC.
Most of this info I've summarized from "The Politics of Canada's Airlines" by Garth Stevenson. It was published in 1987. I haven't had the chance to read it all through yet, but from what I have read it's quite good. It seems to trace out the path of Canada's airlines up to the '80's quite well, and provides some interesting understanding of how we got to where we in aviation. It's a fairly academic sort of book (the writer is a political science professor), so you may have to look in a university library if you want to read it. It has a whole chapter devoted to "the STOL experiment." It also touches on all sorts of other topics, from the rise of Pacific Western, to the Mirabel/Dorval policy, the proposal of the Pickering airport, and so on.