Okay, you are doing the right things.
Sending to an address that was not* on his Paypal account was a mistake, but especially at Christmas an easy mistake to make.
This is the probable reason for losing the PP claim. You have to prove that the item was delivered to an address on the buyer's account.
You have reported it to the police? Good. You may need the report number, but you should be aware that with these international cases, there is not much they can do.
You opened a case with USPS and Canada Post? Good, that means you are probably eligible for an insurance payment, if CP /USPS cannot find delivery confirmation (Remember, it is possible that the be buyer really has not received the watch. Unlikely, but possible.).
If you shipped by either Expedited USA or ExpressPost USA, you are automatically eligible for up to $100 reimbursement in case of loss or damage in transit. You were allowed to buy extra insurance if necessary.
However, it is also possible that the service will show that the watch was delivered. Or it may be delivered in the near future. In which case, the PO did its job and will not pay out.
Add the police report number to the PO insurance claim. Add the information that the buyer has claimed non-delivery and received his money back. Be sure to record the PO case number.
It is a good idea with these complex claims to PHONE Canada Post, rather than using either your local Post Office or the email system. The phone clerks are in Canada and are quite smart women. A calm polite demeanour and that police report number is more likely to get your money back, or a USPS postal fraud investigation than hysteria.
Since these are fairly expensive watches, it may be a good idea to make an insurance claim on your home policy. You will need your receipt for the original purchase to establish the value along with the paperwork generated by the eBay sale and the claims.
Note that you can only make one successful claim. Obviously, you can't collect from PP, the PO and your insurance company for the same theft.
*Paypal allows multiple addresses on a single account, but they must all be in the same country.