A decision by the Manitoba Criminal Code Review Board says Vince Li must remain in the Selkirk Mental Health Centre or at the psychiatric centre at a Winnipeg hospital.
He is also being allowed unsupervised visits to the Manitoba capital as long as he is carrying a cellphone.
Federal Heritage Minister Shelly Glover, who is member of Parliament for the Manitoba riding of Saint Boniface, issued a statement late Friday expressing concern about letting Li "walk freely amongst innocent Canadians."
"Vince Li beheaded a man," said Glover. "For the second time this week, I would like to clarify that this type of situation is exactly why we made changes to the Criminal Code in the Not Criminally Responsible Reform Act.
"It is unacceptable that dangerous and violent offenders are released into our communities, when they pose a threat to society."
The board is also allowing the possibility of Li living in a group home.
"Upon receipt of an updated assessment report, including a detailed community living plan ... the board may consider and approve ... an extended pass to reside at a Level V group home in the community," the board said in its decision released Friday.
During a hearing earlier this week, psychiatrists testified Li has shown profound improvement and is a low risk to reoffend.
Li's psychiatrist, Dr. Steven Kremer, told the hearing that Li has not had any hallucinations in over a year and understands the need to take his medication.
Kremer said that if Li, 46, were transferred to a group home, staff there would ensure he continued the medication necessary to manage his schizophrenia.
Li has been confined to the Selkirk psychiatric institution north of Winnipeg since he was found not criminally responsible for stabbing, mutilating and beheading Tim McLean on a bus to Winnipeg in July 2008. Li sat next to the 22-year-old McLean after the young man smiled at him and asked how he was doing.
Li said he heard the voice of God telling him to kill the young carnival worker or "die immediately.'' Li repeatedly stabbed McLean who unsuccessfully fought for his life. As passengers fled the bus, Li continued stabbing and mutilating the body before he was arrested.
The review board has gradually been giving Li more freedoms.