The Portugal right-back spent the second half of this season on loan with the Bavarians.
Despite winning the Bundesliga with Bayern, the defender did not have the best of spells.
Cancelo was in and out of the Bayern side under Julian Nagelsmann and then Thomas Tuchel.
Per Florian Plattenberg of Sky Sports Germany, Bayern have no interest in signing him permanently.
Cancelo will either return to City, where he has a poor relationship with boss Pep Guardiola, or try to find a new club.