The capital club have earmarked the Paris Saint-Germain coach as the perfect replacement for Jose Mourinho and are hopeful of landing the Italian as their new trainer.
While PSG have so far been adamant that they will not let go of the former AC Milan boss, the 53-year-old is already planning for the future at Madrid and he is keen to make Canales his first signing.
Ancelotti has long been a keen admirer of the 22-year-old and already wanted to sign the then Racing Santander star in 2010 when he was still in charge of Chelsea.
However, Canales had already given his word to Madrid and eventually joined the Santiago Bernabeu side instead.
The midfielder failed to secure regular first team football under Jose Mourinho, though and was farmed out on loan Valencia in 2011-12 before making his stay at los Che permanent in the summer of 2012.
Injuries have halted Canales’ progress in the past two seasons, but Ancelotti has not forgotten about the creative midfielder just yet and is keen to snap him up this summer.
Canales has a €61 million buy-out clause in his Valencia deal, which runs until June 2017, but Madrid could re-sign him for as little as €12m due to a buy-back agreement they inserted when selling the midfielder last year.
The 22-year-old has made 12 La Liga appearances so far this term, netting two goals in the process.