The victory for the Canadian was his first over Federer in seven meetings and also snapped the Swiss maestro's 14-match winning streak.
Winner of six ATP titles, including in Washington this year, Raonic must claim the Paris title to guarantee his place in London for the eight-man season finals.
In a match dominated by serve, Raonic took the first set in a tie-break before forcing the only break of serve in the match at 5-5 in the second before closing out the tie.
He has now reached the quarter-finals or better in 13 of his last 18 Masters appearances.
Behind a first serve percentage of 67 per cent and 21 aces, Raonic always had his illustrious opponent under pressure and served out the match in just over 90 minutes.
"I played well throughout the match and served really well so it's a great victory," said Raonic, who now faces Tomas Berdych in the semifinals on Saturday.
Raonic created the only break point of the first set at 3-2 up but Federer was up to the task as booming first serves from both players dominated affairs.
There were 18 aces in the opening set with Raonic bombing down 11 but the tie-break decided the set and it was the Canadian who had the last word as he painted the line with a huge serve to claim the set with an ace in just under an hour.
The second set was equally tight before Raonic snatched the crucial break in the 11th game before closing out his historic victory.
Berdych guaranteed his place at the World Tour finals for the fifth straight year when he defeated South African Kevin Anderson.
The Czech, who won the Bercy tournament on his debut in 2005, his only Masters title to date, came through a tight contest 6-7, (4/7), 6-4, 6-4 in just under three hours.
It was the 12th victory for Berdych over Anderson in 12 meetings.
"We've had some very close matches and some five-setters but I think the statistics do not tell the real story," he said.
"It's always tough against Kevin and today we played nearly three hours but I think it was a great match.
"No matter how many times you make that, it's probably never going to be, you know, like a routine thing," Berdych added on his qualification for London.
"It's always just proof of having a great season, and especially in this era of tennis. I'm so happy and feel lucky to have made it through so now it's another semi-final and it's been a great tournament for me so far."
Berdych, who also reached the semi-finals of the Miami Masters where he withdrew with a stomach bug before facing Rafael Nadal, is chasing an 11th ATP title and third this year after victories at Rotterdam and Stockholm.
The players now qualified for London are Novak Djokovic, Federer, Stan Wawrinka, Marin Cilic, Andy Murray and Berdych with David Ferrer and Kei Nishikori holding the last two spots and trying to hold off the charging Raonic.
British number one Murray is next on court against world number one and defending champion Djokovic before Spanish fourth seed Ferrer tackles sixth seed Nishikori in the last quarterfinal match-up.