A severed head was left on a street in the southern Philippines, authorities said, five hours after a ransom deadline set by Islamist militants holding Western hostages and others.
Canada's Prime Minister identified the victim as a 68-year-old Canadian.
Justin Trudeau said John Ridsdel of Calgary, Alberta, was killed in a "cold-blooded murder" by the militants. Trudeau said Canada would work with the Philippine Government and international partners to bring those responsible to justice.
The beheading underscored fears of widening violence by Islamist guerrillas, known as the Abu Sayyaf group, as it forges possible allegiances with Isis (Islamic State).
It also raised fears of other execution-style killings among those held.
Abu Sayyaf has taken hostages for decades - and killed captives - as part of a rebellion it has claimed to be waging on behalf of the Muslim minority in Asia's only predominantly Roman Catholic nation.
The Philippine Government has denounced the Abu Sayyaf group as a terrorist organisation that also operates more like a criminal gang, engaging in kidnapping for ransom, extortion and drug trafficking, among other crimes.
The severed head - described by authorities as the remains of a Caucasian male - was found inside a plastic bag dropped along a street in Jolo, a provincial capital in the southern Philippines, said Jolo Police Chief Superintendent Junpikar Sitin.
The Abu Sayyaf group had set a deadline for payment of the equivalent of US$6.5 million for each of its foreign hostages, including two Canadians and a Norwegian man seized along with a Filipino woman in September from a marina on Samal Island in the country's south.
Officials in Philippines did not immediately identify the remains.
But the Canadian Broadcasting Corp. reported that the beheaded man was Ridsdel, a former chief operating officer of mining company TVI Resource Development Philippines Inc., a subsidiary of Canada's TVI Pacific mining company.
Ridsdel had worked most recently as a consultant for the company, the CBC reported.
In various videos purported posted by Abu Sayyaf, Ridsdel, fellow Canadian Robert Hall and Norwegian Kjartan Sekkingstad were shown appealing to the Philippine Government to stop military operations against the militants. Police and military officials said in a statement that a military rescue operation was underway before Monday's ransom deadline.
Abu Sayyaf is also believed to hold other foreigners, including a Dutch man, a Japanese and a group of Malaysian and Indonesian seamen.
In November, Abu Sayyaf militants decapitated a Malaysian hostage on the same day that the Malaysian Prime Minister arrived in Manila for a summit.
Abu Sayyaf - a collection of militant splinter groups - has been weakened by expanded military and police operations over the past decade, but it retains footholds in jungle hideouts used as bases for sporadic attacks and kidnappings. The group had claimed an alliance with al-Qaeda, but it recently publicly proclaimed allegiance to Isis.
This month, US Defence Secretary Ashton Carter said Isis could help inspire increased attacks by Abu Sayyaf militants, such as a recent attack on a Philippine military base that killed at least 18 troops.