Nadal has not made the last four of a major tournament since the 2014 French Open but he now stands two wins away from a 15th grand slam triumph after beating Raonic 6-4 7-6 (9/7) 6-4.
His reward is a meeting with the in-form Bulgarian Grigor Dimitrov, who had earlier seen off Belgium’s David Goffin 6-3 6-2 6-4.
The Spaniard’s victory also moves him one step closer to a potential ninth grand slam final against Roger Federer, who plays fellow Swiss Stan Wawrinka in the other semi-final on Thursday.
Dimitrov will certainly be no pushover, however, having continued his superb start to the season by reaching his second grand slam semi-final in Melbourne.
Nadal’s dismantling of Raonic, the highest seed left in the tournament, was impressive and another indication he may be ready to reclaim the title he won in Rod Laver Arena eight years ago.
Nadal lost here in the first round to Fernando Verdasco 12 months ago and admitted to wondering if he might never challenge for major honours again.
“I am not a very arrogant person so I always have doubts,” Nadal said.
“It is normal, even when I was winning a lot I have doubts so you can imagine I have more when I am not winning and have injuries.
“The good thing is when you have doubts you feel ready to work more, you know how tough all the victories are.
“I had a great career but had a lot of tough moments that makes me enjoy even more the good moments like today.”
Raonic squandered six set points in a tight second set, three at 5-4 and another three in the tie-break, before Nadal converted his first to move two sets clear.
The Canadian had beaten Nadal in Brisbane earlier this month but he struggled with his opponent’s pace and power, and never looked like mounting a fight-back.
Nadal will play Dimitrov tomorrow, a day later than Federer’s match with Wawrinka, but said he would be watching the all-Swiss showdown.
“I love the sport,” Nadal said. “If you don’t want to watch this match you don’t like the sport.”
Dimitrov was tipped as a future star when he made the last four at Wimbledon in 2014 but it has taken longer than expected for his talent to blossom.
His victory over Goffin, however, means the 25-year-old now has a very real chance of making the final and securing his first grand slam title.