Somewhere in the 14th century, Claus is a peasant woodcutter in his mid-50s who, with his wife Anya, delivers his gifts to the children of a certain village. One night, Claus, Anya and their two reindeer, Donner and Blitzen, are rescued from certain death in a blizzard, only to be transported to the vast "ice mountains, way up at the top of the world." Their expected arrival is heralded with the appearance of several elves, or as Claus's people call them in their legends, the Vendegums, led by the venerable and wise elf named Dooley. Inside the elves' home, Claus and Anya also meet inventive elf Patch, and the more down-to-earth Puffy. Dooley tells Claus it is his destiny to deliver toys to the children of the world every Christmas Eve, which the elves will make in their large workshops. Donner and Blitzen are joined by six other reindeer and fed magic food that allows them to fly. When Christmas Eve comes, Claus is approached by the oldest of elves, the Ancient One, who renames him as "Santa Claus".
Centuries pass as the mythology of Santa is created, until the 20th century, where Santa is exhausted by the continuous workload he must do every year due to the world's increasing population. Anya suggests he enlist an assistant, to which Patch and Puffy compete to earn via a competition to produce the most toys in a limited amount of time. Patch uses a machine he has invented, and although he wins, it begins to produce shoddy works without his knowledge. During his annual deliveries, Santa befriends a homeless 10-year-old orphan boy named Joe in New York City and takes him for a flight around the skyscrapers of Manhattan in his sleigh. Santa lets Joe take the reins, who flies the sleigh underneath the Brooklyn Bridge much to Santa's horror, who then playfully gets his own back on Joe by having his reindeer perform the "Super Duper Looper", around the Twin Towers of the World Trade Center - an aerial trick that involves them doing a complete 360 degree turn, but Donner always fails due to acrophobia. Santa takes Joe on his deliveries where they meet 9-year-old Cornelia, a wealthy child and also an orphan who fed Joe one previous night.
On Christmas Day, Patch's toys begin to fall apart, prompting him to quit his job and let Puffy take over. Traveling to New York, Patch meets B.Z., Cornelia's step-uncle and a scheming executive of a toy company that faces a total shutdown by Congressional investigation due to unsafe products. Believing B.Z.'s toys are popular due to witnessing several toys being removed from a shop window, Patch decides to help B.Z. make better toys, using some of the reindeer feed to create lollipops which can make people fly and giving them to children for free (the latter fact causing B.Z. to sputter and yell, "FOR FREEEEE?!"). Patch also constructs a hovercraft called the Patchmobile to deliver the products like Santa and helps create a new holiday on March 25, which B.Z. deems "Christmas 2". Santa disapproves of Patch's actions and feels disheartened about continuing his job if the children of the world do not care anymore. Meanwhile, Patch is disturbed when B.Z. plans to turn himself into the face of Christmas, and asks Patch to develop candy canes which enable flight.
While Patch works at night, B.Z.'s assistant, Dr. Eric Towzer, appears at his house and reveals the candy canes will explode if exposed to heat. B.Z. proposes they flee to Brazil and let Patch take the fall for their criminal neglect. Joe and Cornelia eavesdrop on the conversation, but Joe is caught and locked up in the basement of B.Z.'s factory. Patch finds Joe and discovers Santa made a carving for Joe that resembles him. Thrilled that Santa remembers him, Patch and Joe set off in the Patchmobile to the North Pole. Cornelia sends a letter to Santa informing him of the situation. Despite Comet and Cupid having the Flu, Santa gathers up the other six reindeer and he arrives to pick Cornelia up. Santa and Cornelia pursue the Patchmobile, which is carrying a huge supply of candy canes on the verge of exploding. Santa convinces his reindeer to perform the Super Duper Looper in order to catch Patch and Joe as the Patchmobile explodes. Meanwhile, B.Z.'s crimes are uncovered when Cornelia calls the police. As Dr. Towzer and B.Z.'s chauffeur, Grizzard, are arrested, B.Z. attempts to evade the police by eating several candy canes and tries to fly out of his office window only to fly up into the sky.
The film ends with the inhabitants of the North Pole celebrating the triumph with a joyous dance party, where Cornelia and Joe have been adopted by Santa, his wife and his elves, whilst B.Z., in spite of his pleas for help, is doomed to float off into the depths of space, among the equally-affected remains of the Patchmobile as the end credits roll.
Who adopted Cornelia and Joe?
Santa Clause.