Notepad is I think one of very few remaining text editors that can't handle Unix line endings as well as Windows line endings. The XSLT 2.0 spec allows the serializer to change line endings to the preferred form for the target platform, but it doesn't require it: Saxon outputs exactly the characters that the stylesheet tells it to output, which in this case is a single newline character (i.e. a Unix line ending). If you want the Windows line ending you have to ask for it:
<xsl:text>#x0d;#x0a;</xsl:text>
Michael Kay
http://www.saxonica.com/
Author, XSLT Programmer's Reference and XPath 2.0 Programmer's Reference