This is the standard message XenServer gives when it cannot allocate enough space on the SR hosting the VM to create a Snapshot. Its not the Backup target it is complaining about, just the SR hosting the VM. A Snapshot requires an equal amount of space to that of the VM, though only temporarily, while the back up is running.
A workout around is to let Xackup Halt or Suspend the machine and also turn off Snapshotting in the Job configuration. This might be acceptable for you. The alternative is to increase the size of the SR or to let XenCenter run a scan to clean up unneeded space.