As Scott Calvin, expertly portrayed by Tim Allen, settles into his role as Santa Claus, he approaches the challenging milestone of eight years in the iconic red suit. Just when he thinks he has everything under control, he is faced with an unexpected dilemma: the "Mrs. Clause." The Head Elf, Bernard, along with Curtis, the Keeper of the Handbook of Christmas, presents Scott with an ultimatum—he must marry before the next Christmas Eve or risk losing his position as Santa forever. Complicating matters further, Scott learns from Abby the Elf that his teenage son Charlie has landed on the naughty list due to his reckless behavior at school. The stakes are high for Scott as he scrambles to mend both his personal and professional lives.
To tackle these challenges, Scott pays a visit to the prominent Council of Legendary Figures, which includes Mother Nature, Father Time, Cupid, the Easter Bunny, the Tooth Fairy, and the Sandman. In seeking their wisdom, Scott aims to salvage his relationship with Charlie and find a suitable Mrs. Claus. In a creative effort to cover for Santa's prolonged absence, Curtis teams up with Scott to create a life-sized animatronic Santa clone, much to the dismay of Bernard, who ultimately relents and spreads word of Santa's makeover, justifying the synthetic duplicate's appearance.
As the weight of these responsibilities bears down on him, Scott begins a gradual “de-Santafication process” that strips him of his magical abilities, reverting him to his former self, Scott Calvin. Limited in magic, Scott returns home to face his ex-wife Laura, her husband Neil, their six-year-old daughter Lucy, and Charlie. The family reunion quickly turns tense when Charlie faces reprimand from school principal Carol Newman for vandalizing lockers.
Meanwhile, at the North Pole, Toy Santa becomes fixated on the rulebook, interpreting it with rigid literalness. His misguided views lead him to deem anyone who commits even minor infractions as naughty and deserving of coal. In a shocking twist, Toy Santa seizes control of the North Pole with his own handmade toy soldiers and reveals his sinister plan to the elves. Bernard bravely exposes Toy Santa as a fraud, leading to the latter’s vengeful decision to place him under house arrest.
As Scott's bond with Carol, portrayed by Wendy Crewson, deepens, he finds himself caught up in the joys of the season. He joins her for the faculty Christmas party, where she shares her childhood struggles with believing in Santa, having been disillusioned by skeptical peers. With his unique holiday magic, Scott enlivens the gathering by gifting each guest their fondest childhood presents. He has a special surprise saved just for Carol, which culminates in a kiss beneath the mistletoe. However, when Scott tries to reveal his true identity as Santa Claus, she misinterprets his words as a jest, leaving her hurt and infuriated.
Later, Charlie struggles with the ethical implications of his father dating his principal, feeling immense pressure to keep the secret that his dad is actually the jolly old Saint Nick. Thanks to the wise counsel of Lucy, he grapples with his feelings, ultimately deciding to convince Carol of Scott's true identity by sharing the enchanted snow globe from Scott's initial transformation.
As Curtis alerts Scott about Toy Santa's malevolent intentions, Scott finds himself drained of magic after pursuing Carol. With the help of the Tooth Fairy, he and Curtis make a brave return to the North Pole, only to fall into Toy Santa's grasp. Fortunately, Charlie and Carol come to their rescue, summoning the Tooth Fairy to aid them in their quest. As the battle ensues, Scott recruits Chet, a spirited young reindeer-in-training, to chase after the escaping Toy Santa, who has hijacked the sleigh. The struggle shifts in favor of Scott when Carol, Bernard, Charlie, and Curtis unite an elf army to mount a snowy onslaught against the toy soldiers, ultimately shrinking Toy Santa to a mere six inches in height.
In the resolution of this festive adventure, Scott finds love as he marries Carol in a jubilant ceremony, transforming back into his beloved Santa Claus persona. Carol embraces her new role as Mrs. Claus, joining her husband as they celebrate Christmas with the usual joy. As the secrets of Scott's true identity unfold for Lucy, he and Charlie pledge to protect the magic that defines the holiday season.
