Two issues with what you are doing:
1) The <GlobalPrettyPrintingOptions> section of the CTM file does not support the <PreserveSpace> setting. It is allowed in the per-element settings only.
2) The <PreserveSpace> setting only controls pretty printing. It does not affect the rendering of Tags On or Normal views. For that you must set the CSS "white-space" setting to something appropriate, probably "pre" in your case.
XMetaL Developer should guide you in the proper creation of your CTM file, at least letting you get the right settings in there. I assume this means you are editing your CTM file directly with a text editor of some kind. You should be careful not to introduce anything that is unrecognized and that the format is good (at the very least always well formed). For the most part XMetaL Author and XMAX are forgiving when they see something in your CTM that they do not understand, but you could end up causing unexpected behavior as we do not test every possible incorrect combination of options or invalid files.
