You should absolutely NOT ask the buyer to file for "Not as Described". Whoever gave you this information either did not understand your question or was poorly informed themselves about the new defect system. If the buyer does this, you'll get an immediate (and probably irreversible) defect.
Tell the buyer you'll happily refund, and that you'll follow up right away with a cancellation request -- you should probably ask them to let you know if they'd like to cancel, then you have it on record. Make sure they understand that the request will come through eBay, not directly from you, and that although the word "dispute" may appear in the title, it is not a dispute (heaven only knows why eBay has to include that word in the cancellation subject line). Let the buyer know that as soon as they agree to the cancellation the transaction will be closed and there will be no further obligation on their part.
I would send the refund before the cancellation. The reason is that if you attempt a cancellation first, the buyer could become suspicious that you are trying to close the transaction without refunding, and you might risk having the buyer refuse the cancellation. Also, refunding cheerfully first is encouragement to make the buyer happy, and most buyers, once they are refunded, will gladly agree to a cancellation. Just make sure you follow up with the cancellation promptly after refunding, otherwise you may find your buyer will forget to come back and deal with it, leaving you with a 7-day wait before you can cancel the transaction yourself.
When you process the cancellation, you'll see a pop-up screen that asks you to give the buyer a reason for wanting to cancel the transaction. By all means, in this case choose the option "Buyer purchased item by mistake or changed mind", as this (according to eBay) should not result in a defect. I believe (if I recall correctly), you have to first make the selection that the buyer and seller have agreed to the cancellation.
By the way, some sellers seem to be reporting that refunds (for any reason) are generating automatic defects. The eBay.ca have assured us that a proper cancellation after a refund will remove/prevent such a defect, but I'm not sure I have total faith in that assurance. You might want to check your defect figures come August 20th to make sure that eBay has not actually recorded a defect against you for this transaction, and call them if they have. While you deal with this buyer, ensure that all your messages to the buyer are done through eBay Messages so that the communications are available within eBay. And remember that even after a cancellation the buyer can still leave feedback, so keep messages bright and friendly. Best of luck!
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