1) If one is required to provide proof of delivery by PayPal, that proof must consist of a verifyable service. For Canada Post that is Expresspost with tracking, registered mail or courier services. Proof of delivery is required, not just proof that it was sent. (your mileage may vary)
2) Reference numbers are not tracking numbers. If you examine your light packet label you will find a 16 digit Canada Post reference number. This reference number is not a tracking number and does not represent a gaurantee that the item was delivered, but rather an internal tracking reference so Canada Post can monitor packages moving through the system.
Light packet service is treated as lettermail, with the added bonus of a reference number which is why light packets are by default defined as airmail on the label. Should a light packet go missing, the reference number is what Canada Post follows to figure out where the package was last touched by human hands, when you file a claim. When the CP tracking system says a light packet has been delivered, it only guarantees that the item reached the final leg of the journey and it was send to the posties pile of items to be delivered. It can still fall of the truck so to speak and never reach the buyer, but the post office then knows who they need to keep an eye on.
3) As for Paypal disputes, if you need to enter tracking in a dispute resolution, the software doesn't care what you enter, it will still spit out an email acknowledging compliance and move on to the next stage, even if you provide the tracking number "Your mother wears army boots".
If the dispute ends up being escalated, then a human looks at everything and makes a determination as to who is at fault and who is in compliance. At that point, what your mother wears doesn't concern the Palpay arbitrater and probably will take a dim view, possibly finding in the other person's favour on the spot so he/she can move on to the next dispute. There are a LOT of them, and the frequency appears to be growing. The few bodies that do this work can't be wasting time.
4) As for which way to go, Paypal shipping or CP direct, I prefer to use the Paypal mechanism for USA Light Packet and all parcels because most of the data entry is done for you (although after 10 years, they still can't get it right more than 80% of the time). If you have your own checkout software, then that's obviously the way to go. For domestic flat items I do lettermail and get out the moose, polar bears, lunes and start licking.
5) Subtle note on Paypal shipping... if you are shipping via CP, they bill and get paid in Canadian dollars. If you are selling in both CA and US dollars, try and make sure you keep enough cash in the CAD account to cover all your shipping otherwise Paypal takes you to the cleaners on the currency conversions.
PS. For lost lettermail in Canada, submit a claim on the CP website, that way they will check the lost and found... you might get lucky...