On Christmas Eve, Lawrence and Linda find themselves stranded at the airport, waiting impatiently for Lawrence's parents to arrive from England. Meanwhile, in Danville, Phineas and Ferb undertake their signature holiday project by transforming the top of their house into a fantastical rest stop for Santa Claus. Their elaborately decorated setup includes a sauna, massage table, satellite TV, an elliptical trainer to work off milk and cookies, a special reindeer feeding station, and a beard purifier. These inventive brothers then rally the entire town to pitch in and decorate the city for Christmas, spreading festive cheer as they go. However, while Candace [Ashley Tisdale] dismisses their enthusiasm as childish because they still write letters to Santa, she’s preoccupied with trying to find the perfect gift for her boyfriend, Jeremy [Mitchel Musso]. During her quest, a heartfelt song titled "What Does He Want" plays in the extended episode, emphasizing her inner conflicts and hopes.
Meanwhile, Perry the Platypus [Dee Bradley Baker] sneaks away from his covert missions to attend a Christmas party hosted by his organization, OWCA. There, he receives a "Sal Tuscany" CD from his Secret Santa but quickly receives an emergency alert indicating that Dr. Heinz Doofenshmirtz [Dan Povenmire], the infamous villain, is plotting mischief. Perry swiftly heads to Doofenshmirtz’s lair, where he gets ensnared in an elaborate trap using Christmas lights, topped with a partridge as a humorous touch. Doofenshmirtz reveals that his uncle has sent him a "Naughty-inator", a device capable of ruining Christmas by turning everyone on Santa’s Naughty list into naughty. Despite his usual villainous intent, Doofenshmirtz admits he doesn’t actually dislike Christmas; his main dilemma is deciding whether to activate the device. However, under pressure from carolers demanding figgy pudding and singing "We Wish You a Merry Christmas", he succumbs and activates the "Naughty-inator".
The device causes Santa’s North Pole workshop to mark everyone in Danville as naughty, canceling Christmas for the town’s residents. Phineas, Ferb, and their friends are devastated and decide to fight back by broadcasting a song explaining why Danville deserves to be considered nice — their message is aimed at the North Pole. Two elves, Blay'n and Clewn't, receive the broadcast and arrive in town, puzzled about why the city is labeled naughty instead of the people. They conclude that it’s the city itself that is considered naughty. Meanwhile, Doofenshmirtz, still unsure about the morality of his actions, puts Perry’s Sal Tuscany CD into his stereo, and as Tuscany sings, "Christmas cannot be destroyed not even by a Naughtyinator!", the vibrations disable the device, restoring Christmas cheer and removing the naughty labels from everyone.
Realizing it’s too late to undo the damage with Santa, the kids decide to create a flying sleigh with help from Blay'n, Clewn't, Isabella [Alyson Stoner], Baljeet [Maulik Pancholy], Buford [Bobby Gaylor], and even Candace [Ashley Tisdale]. Their plan is to deliver presents swiftly across the town, though they struggle with visibility in the dark and a jammed present cannon. Thanks to Baljeet’s quick thinking, a misfired present ends with him flying down a chimney, where he finally gets his Christmas wish — a tender kiss beneath the mistletoe from a girl. Buford, who had been on the Naughty list, manages to rally the town to turn on their Christmas lights, which puts him on the Nice list. Their efforts eventually succeed, and every household receives a present.
In the midst of the chaos, Perry escapes and catches Doofenshmirtz in a trap made of Christmas lights, leaving him to finally hate Christmas in a humorous twist. When they return home, they find that Santa has already visited Danville, having used the rest stop at Phineas and Ferb’s house. Santa thanks the boys for their help with the deliveries before flying off into the night with his sleigh hitched to their creation.
An amusing discovery unfolds when Doofenshmirtz smashes the Sal Tuscany CD, only to realize it was a gift from Santa Claus himself—anagrams reveal that "A Sal Tuscany" is quite literally Santa Claus. This prompts Doofenshmirtz to see the holiday as a moment of celebration rather than despair. As a touching conclusion, Candace sells her necklace (which she intended to turn into earrings for Jeremy) to buy him a new guitar, while Jeremy parts with his old one to help her get the earrings she desires.
Finally, Lawrence and Linda return with the children’s grandparents as the town’s residents open their presents — even Doofenshmirtz receives a gift from Perry: his favorite almond brittle. Throughout the festive night, everyone experiences the warmth of the season, highlighting experiences of kindness, forgiveness, and the true spirit of Christmas, culminating in a joyful celebration for the entire town.
