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My cat did the same exact thing, except with tissue paper. Left bits and pieces all over the house. The "water gun approach" would be a good idea, as long as you're not using a high-powered water blaster on the poor cat. I used a spray bottle, picked up from the dollar store. Spray the cat when needed (don't overdo it, though) or just take the toilet paper away and stuff something else, like one of his (his?) toys in his face. He'll learn eventually, hehe.
This is what we did, and I hope it helps. If not... well, I tried :/