"The raycasting is correct to work better for small scale. The issue is now that the ray direction is calculated in rect space instead of world space to get more accuracy. With the scale being zero, when using rect space the ray direction is zero on the z. This prevents the ray from hitting anything."

This is a new logical behavior in Unity 2017.1 (In previous versions (5.6) changing local Scale z to 0 did not have any effect). However, this has not been documented in Release Notes and anywhere in Documentation. We want this to be documented somewhere (possibly in Raycast page or Canvas page).