It’s quite strange that this is happening since I think that TeX (the brains behind PrintDraft) is what motivated that tilde-as-space idea in the first place.
Instead of digging into the xetex modules and trying to figure out why this is happening, I’ll give you the easy work-around.
If you don’t have a PrintDraftChanges.txt file in the main project folder (not, oddly enough, in the PrintDraft folder), create it.
Add the following line into that. It will make the substitutions on the fly as you do PrintDraft:
“\u007E” > “\u00A0”
[edit: correction as CrazyRocky pointed out I had used the wrong space unicode character]