It is popping up. You just cannot see it, because services
run on invisible desktop, different from the default interactive
desktop.
You have to chek "Allow service to interact with desktop"
option in the service properties in order to run CF service on the
default desktop. After that you will see the Notepad window.
You are getting the timeout error, because notepad.exe never
terminates (see above). When setting timeout to 0, you just start
another detached invisible instance of notepad.
You also can use
CFX_EXEC to
launch Notepad on interactive desktop.