The 28-year-old full-back made the surprise temporary switch to the Allianz Arena on the final day of the January transfer window, after losing his regular place in Pep Guardiola's starting lineup.
Cancelo was regarded as an influential member of Guardiola's squad earlier this season, starting all 14 of City's Premier League games before the World Cup as well as featuring in all six Champions League group-stage fixtures.
However, the Portugal international fell out of favour with the Catalan boss after the World Cup and was reduced to just three starts in 10 competitive matches across all competitions - watching on as an unused substitute on five of those occasions.
Guardiola has frequently used Nathan Ake at left-back since the tournament in Qatar, while the emergence of teenage academy graduate Rico Lewis also pushed Cancelo further down the pecking order.
Cancelo has since featured eight times for Bayern in all tournaments, including two substitute appearances in the 3-0 aggregate victory over Paris Saint-Germain in the Champions League last 16.
Friday's quarter-final draw has paired Julian Nagelsmann's side with bookmakers' favourites Man City, who thrashed German outfit RB Leipzig 8-1 on aggregate in the last 16, including a 7-0 second-leg triumph.
Despite joining Bayern on loan from Man City in January, Cancelo is eligible to face Guardiola's side in the Champions League, with UEFA rules stating that loan players are allowed to play against their parent club.
UEFA rules on this matter differ to those in the Premier League, with players out on loan not allowed to face their parent club in England's top tier.
Teams can negotiate clauses to prevent a player from facing their parent club, but Man City decided against including such an agreement in Cancelo's loan to Bayern in January.
Man City have previously been haunted by one of their own in the Champion League, as Celtic loanee Patrick Roberts scored in a 1-1 group-stage draw at the Etihad Stadium during Guardiola's first season at the club in 2016-17.
Meanwhile, Bayern have history with fielding loan players against their parent clubs, with Philippe Coutinho scoring twice as a substitute against Barcelona in the infamous 8-2 victory in the 2019-20 Champions League quarter-finals.
Four years earlier, Kingsley Coman scored in extra time to help Bayern beat parent club Juventus 4-2 in the second leg of their Champions League last-16.
Elsewhere, former Chelsea goalkeeper Thibaut Courtois helped Atletico Madrid win 3-1 on aggregate in the 2014 semi-finals during the final year of his three-year loan spell with the Spanish side.
Bayern will travel to the Etihad to face Man City in the first leg of their quarter-final tie on April 11, before hosting the reverse fixture at the Allianz Arena eight days later.