The COC said in a statement released early Friday that assistant coach Andy Spence would lead the defending gold medalists for the remainder of the tournament.
Canada's camp was thrown into disarray this week after two team staffers were sent home for allegedly using a drone to spy on a New Zealand practice.
Priestman denied any involvement, but did not attend Thursday's 2-1 victory over New Zealand as FIFA — soccer's world governing body — and the International Olympic Committee investigate.
Canada Soccer CEO and general secretary Kevin Blue said in the COC release "additional information has come to our attention regarding previous drone use against opponents, predating the Paris 2024 Olympic Games."
He added Priestman was suspended from her duties until the end of the tournament and the completion of the organization's independent external review.
The COC said Wednesday that assistant coach Jasmine Mander and analyst Joseph Lombardi were "sent home immediately," and that it had accepted Priestman's decision to remove herself from coaching the opening match.
Priestman held a brief media availability Wednesday after guiding her team through a one-hour practice.
"My reaction was you feel like this program has let the country down," the 38-year-old Priestman said. "That's why I took the proactive step to do what I felt was the right thing. Irrespective of the details, I'm ultimately accountable."
Priestman had agreed to a contact in late January to coach Canada through the 2027 Women's World Cup.
Priestman was hired in November 2020 to succeed Kenneth Heiner-Møller and had been working on a rolling contract. She led Canada to a gold medal at the 2021 Olympics, but was eliminated in the group stage of last year's World Cup. She has coached the team to 28 wins, nine losses and 10 draws.
Priestman spent five years with the Canadian Soccer Association in a variety of coaching roles before returning in June 2018 to her native England, where she served as coach of the women's under-18 team and assistant coach with the senior women's team. Before that she spent 4 1/2 years as head of football development in New Zealand before leaving in June 2013.