In the Middle Ages, a woodcutter named Claus delivers hand-carved toys to the children of his village each Christmas, accompanied by his wife Anya and their reindeer Donner and Blitzen. Upon leaving, they are caught in a blizzard and succumb to the cold. They are magically transported to the North Pole and resurrected, and they encounter the resident elves with their magical workshop. Lead elf Dooley explains that their coming was prophesied; that it is Claus’ destiny to deliver the toys made by the elves to the children of the world; and that they, like the elves, will live forever. The following Christmas Eve, the oldest elf dubs Claus “Santa Claus” and explains that the night will last as long as it takes for him to deliver toys to every child on Earth. Donner and Blitzen join six other reindeer and are fed hay sprinkled with magical powder that enables them to fly, pulling Santa’s sleigh through the air. As the centuries pass, much of the mythology and traditions surrounding Santa Claus develop.
By the late 20th century, Santa is exhausted by his ever-growing workload, and Anya suggests that he enlist an assistant. Two elves compete for the position: Puffy, who follows traditional toymaking methods, and Patch, who has many ideas for modernization. Patch wins by designing a machine to increase production through automation, but unbeknownst to him, it begins to malfunction and produce shoddy toys. In New York City, Santa befriends homeless orphan boy Joe and takes him for a ride in his sleigh. They unsuccessfully attempt the “Super Duper Looper”, a vertical loop maneuver which always fails due to Donner’s acrophobia. They also meet wealthy orphan girl Cornelia, who befriends Joe.
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When the toys produced by Patch’s machine fall apart on Christmas Day, he resigns in disgrace and leaves the North Pole, winding up in New York City. Meanwhile, the B.Z. Toy Company, run by Cornelia’s unscrupulous step-uncle B.Z., is facing shutdown by the government for producing unsafe toys. Seeing the company’s toys being pulled from a storefront, Patch mistakenly thinks they are very popular and approaches B.Z. about a job. Hoping to redeem himself in Santa’s eyes, he creates lollipops laced with the magic powder that allows the reindeer to fly, and a flying car which he uses to deliver them to the world’s children on Christmas Eve.
The lollipops allow people to fly, making them an instant sensation and leaving Santa feeling obsolete and disheartened. B.Z. convinces Patch to strengthen the formula and put it in candy canes, planning to launch his own holiday on March 25 called “Christmas 2”.
Cornelia and Joe overhear B.Z. plotting to oust Santa as the figurehead of Christmas, and Joe is kidnapped. Cornelia further overhears B.Z.’s assistant, Towzer, share his discovery that the candy canes explode when exposed to extreme heat. B.Z. plans to take Towzer and their money and flee to Brazil, letting Patch take the fall for their dangerous product. Cornelia writes to Santa, who rushes to help despite two of his reindeer being sidelined by illness. Patch finds Joe bound and gagged in the toy factory basement and frees him. Seeing a wood carving resembling Patch that Santa made for Joe, Patch realizes that Santa misses him. He and Joe take off for the North Pole in his flying car with the candy canes loaded in the trunk, unaware that they are becoming unstable. Santa and Cornelia pursue in Santa’s sleigh; as the car explodes, they successfully perform the Super Duper Looper, saving Joe and Patch. The police, alerted by Cornelia, have arrested Towzer and B.Z.’s other henchman Grizzard and attempt to arrest B.Z. too, but he eats several of the magic candy canes and jumps out a window, only to float upward uncontrollably into space.
Santa agrees to let Joe and Cornelia live at his workshop, and they celebrate with the elves.
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