An eight-year-old boy is being treated in hospital after being hurt in the incident. His injuries are not thought to be life-threatening.
The collision happened on the first stage of the Highland Car Club Snowman Rally, in Glenurquhart Forest near Loch Ness.
Neither the driver or co-driver involved were injured, and no other spectators were hurt, police said.
The event, which is the first round of the Scottish Rally Championship, has been cancelled.
A statement from the Northern Constabulary said: "Emergency services are currently attending an incident at Stage 1 of the Highland Car Club Snowman Rally at Glenurquhart Forest, Balnain.
"The event has been abandoned and members of the force's Road Policing Unit are in attendance along with members of the Scottish Ambulance Service.
"From initial information it would appear that a car involved in the rally left the track and collided with spectators."
In a statement, the Highland Car Club said: "Following an incident on special stage 1 of the Snowman Rally in which an adult spectator was fatally injured the event has been abandoned.
"The club extends its sympathies to the families of those involved."
- Motor Rallying
- Sports & Recreation
- Scottish Rally Championship