Cancellara defied the pre-race predictions that he would not be able to match the pace of Tom Dumoulin (Netherlands) and Chris Froome (Great Britain) by beating both by a significant margin over the hilly 54.56km course.
Dumoulin placed 47 seconds behind Cancellara to take the silver medal, with three-time Tour de France champion Froome claiming Britain's first cycling medal of the 2016 Games with bronze at 1-02. Froome matched his bronze from the London 2012 Games in the same discipline.
In Cancellara's last season before retirement, it is a fitting end to a stellar career that he should repeat his success from the 2008 Games and take gold in the time trial.
It didn't all appear to be plain sailing for Cancellara, as the official results from the second time check at 19.7km had Cancellara down as fourth fastest behind Rohan Dennis (Australia).
However, Cancellara managed to overhaul that deficit - and some - by the next checkpoint to move into the leading position. Dennis, meanwhile, suffered a broken aero bar and had to have a bike change. The Australian ended up in fifth place.
Geraint Thomas (Great Britain) posted a solid time to place ninth in the race, a considerable result given that he was only allocated a last-minute place in the race after the weekend, with no specific training.
None of the riders had a particularly easy time rain, cool temperatures and wind greeted the riders after days of sunshine. Brent Bookwalter (USA) had a torrid start to his race, crashing on the first corner and ripping his skinsuit. He quickly re-mounted and finished 23rd, one place behind team-mate Taylor Phinney.
Earlier in the day, Kristin Armstrong (USA) had won the women's time trial ahead of Olga Zabelinskaya (Russia) and Anna van der Breggen (Netherlands).
The men's time trial concludes the four road events, as attention now turns to the velodrome for the start of the tracking events on Thursday.
Rio 2016 Olympic Games men's individual time trial, 54.56km
1. Fabian Cancellara (Switzerland) in 1-12-15
2. Tom Dumoulin (Netherlands) at 47 secs
3. Chris Froome (Great Britain) at 1-02
4. Jonathan Castroviejo (Spain) at 1-06
5. Rohan Dennis (Australia) at 1-10
6. Maciej Bodnar (Poland) at 1-50
7. Nelson Oliveira (Portugal) at 2-00
8. Jon Izaguirre (Spain) at 2-06
9. Geraint Thomas (Great Britain) at 2-37
10. Primoz Roglic (Slovenia) at 2-40
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