Paine did not play a senior game with Collingwood in 2013 and became a trade option this week as the Magpies looked for options to secure Karnezis.
North Melbourne had expressed interest in Karnezis, but Collingwood remained his preferred club and he returns home to Victoria after 21 games in three seasons.
Paine, who played six games in 2012, appeared to fall out of favour with Magpie coach Nathan Buckley and was not selected at senior level this season.
The 20-year-old, who kicked 45 goals in the VFL in 2013, is the first player to join the Lions during the Gillette AFL Trade Period as a number of young players leave the club.
Collingwood preferred to use defender Ben Reid as a forward late in the season rather than give Paine an opportunity, but he is well placed to earn games with the Lions.
The recruiting of Sydney Swans' Jesse White also appeared to push the young forward further down the pecking order at the Westpac Centre.
That development left Collingwood with only pick No.67 available to trade for Karnezis, well behind the Kangaroos offer of pick No.47, meaning a player needed to be traded.