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The customization of the email template wouldn’t be causing the issue as all other notification or email from the site are displaying ok and have correct html.
I’m not sure I follow this? You have a custom template that is showing additional padding, but it can’t be the customizations made to that template because other emails are working?
Each template can be individually customized, so it could be the customizations to that template, have you checked the text view of the template in question to check for additional br tags?