Did you set the multi_part parameter to SINGLE_PART?
Try doing a repair geometry on your source. Do they have Z values that might put them outside the tolerance? I'm not sure how Z values interact with XY tolerance actually.
You don't have a projection. That has to be set to work with tolerances.
Try setting your tolerance down to 1 Meter, that worked for me, not sure why.I was having problems with the 5 Meter tolerance as well, I'd think about filing a bug report with Esri.Edit: Also you need to export to a geodatabase. Shapefiles weren't working for this either.
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