Santa Claus receives a letter and a gift informing him of the passing of Mr. Hucklebuckle, a beloved toy store owner and member of the "Santa Cause," a renowned organization dedicated to spreading Christmas cheer worldwide. In the bustling city of New York, his grandson James Hucklebuckle and his wife Kate Huckle arrive at Hucklebuckle's toy store, eager to take charge. Their goal is to make the store profitable during the holiday season so they can become its rightful owners, but they decide to do so by hiring a charming store Santa in hopes of attracting more customers, intending to sell the store afterward.
Meanwhile, at a nearby orphanage run by a stern woman named Ms. Stout, an orphan named Quinn arrives. Quinn struggles with her feelings about Christmas because Ms. Stout disapproves of the holiday and goes as far as stealing toys and destroying them in her incinerator. Despite her rough treatment, Quinn forms a bond with other orphans, including the oldest girl, Willamina "Will", who has lost her Christmas spirit after losing her parents.
To lift Santa's mood, his head elf Eli uses a magical Christmas icicle to bring a stuffed dog to life, naming him Paws. The adorable puppy, voiced by Zachary Gordon, quickly becomes Santa's best friend. At the orphanage, Quinn witnesses Ms. Stout confiscating a doll from Janie, another orphan, and then burning it.
Santa and Paws travel to New York and land in Central Park, catching the attention of a homeless man named Gus, who begins following them. On the streets, Santa accidentally bumps into Ms. Stout, falls into traffic, and gets hit by a cab, causing him to lose his memory. Gus steals Santa's magic crystal during this chaos, further erasing his memories. Wandering lost, Santa stumbles upon Hucklebuckle's toy store the next morning and is taken in by James and Kate, who hire him as their store Santa. Unable to recall his name, he humorously calls himself "Bud," a nickname Gus had called him during their encounter.
While Ms. Stout leaves for a hair appointment, Will sneaks out with Quinn to visit Hucklebuckle's store, where they discover Santa dressed as a store Santa. Will admires a bike on display, and Kate invites Quinn to sit on Santa's lap. Quinn, seeing Santa's kindness, wishes for Will to get the bike and for a puppy to cheer up the orphans at the home. After witnessing Santa's warmth, Quinn becomes convinced he is the real Santa.
Later, as Santa wanders the city streets, Paws befriends three stray dogs—Haggis, Rasta, and T-Money—who steal from a deli and are captured by Franklin, a dogcatcher and Ms. Stout's boyfriend. Using his magic, Paws rescues them, and they vow to help find Santa, hoping to redeem themselves from their naughty list. Meanwhile, Ms. Stout catches the girls, punishing Quinn after she overhears Will criticizing her. Quinn is sent to spend the night in the basement, which causes Will to feel upset and frustrated, feeling that she’s always the one getting into trouble.
In Central Park, a Boy Scout named Jimmy finds the reindeer, who are worried because Santa has gone missing and they can't fly without him. That night, Quinn secretly finds Paws and sneaks him into the orphanage, promising to help find Santa the next day. Will discovers them but can't hear Paws speak because she doesn't believe in Santa. Recognizing the seriousness of the situation, [Eli] and his elf Eddy travel to New York to search for Santa.
Back at Hucklebuckle's, Santa begins to recover his memories. Quinn and Paws sneak into the store and see James pretending to be Santa on a break. Paws quickly realizes this mistake before Quinn can fully believe it, and she is devastated when she finds out her hero isn’t Santa after all. Santa, now having some memories restored, meets Jimmy, the Boy Scout, who informs him that the reindeer are waiting for him. Santa hesitantly gives Jimmy his North Pole pin, recognizing his persistence and sincerity, and begins to regain his Santa spirit.
At the orphanage, Paws uses his magic to bring extra Christmas cheer, singing with the girls to help Will believe again. Ms. Stout soon discovers them, and in her anger, locks Will and Paws in the basement, stealing Paws' crystal and a sentimental ornament belonging to Quinn’s late mother. Will, still struggling with her loss, hears Paws speak and rediscovers her Christmas spirit. However, without his crystal, Paws returns to being a stuffed toy. Ms. Stout, furious, throws him into the incinerator.
Santa, meanwhile, ends up in the hospital after losing his crystal. Eli and Gus realize that without the crystal, Santa could become mortal and face death someday. Gus confesses to stealing the crystal, feeling remorseful. Together, they find the weakened reindeer and help them, while Eli and Eddy rescue Paws from the incinerator just in time to bring him back to life as Santa Paws, a full-grown dog voiced by Mitchel Musso.
In the climax, they rescue Santa, restore his magic with Paws' help, and return him to health. Quinn and Will are reunited, and the orphans find new hope and happiness. James and Kate decide to adopt Quinn and Will, giving them new families. Haggis, Rasta, and T-Money join the elves at the North Pole, becoming official elf dogs. Gus, feeling grateful, donates his earnings from playing Santa to the orphanage, and Mrs. Gibson, the new caretaker, offers a kinder future for the children.
On Christmas Eve, Santa and Santa Paws visit the Hucklebuckles, returning a special ornament to Quinn’s family. By Christmas morning, James and Kate decide to keep the store, continuing the Hucklebuckle legacy, and Mr. Stewart reflects on Hucklebuckle's spirit, wishing him a Merry Christmas and realizing his wish for the store’s future. The story ends with a message of hope, love, and the true spirit of Christmas shining brightly through everyone involved.
