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Eight years have elapsed since Scott Calvin took on the mantle of Santa Claus and became subject to The Santa Clause. Now he is at the top of his game at the North Pole and could not be happier, at least until Head Elf Bernard and Curtis, the Keeper of the Handbook of Christmas break the news that there is another clause — the "Mrs. Clause".
Santa/Scott is now pressed to get married before the next Christmas Eve, or the clause will be broken and Christmas will fade away. At the same time, Abby the Elf delivers news that is more distressing: Santa's own son Charlie is on the naughty list, for acts including vandalizing the walls of the school gymnasium with spray paint, until he is caught by Principal Carol Newman. Scott must return to his home to search for a wife and set things right with Charlie. He brings this up when visited by the Council of Legendary Figures consisting of Mother Nature, Father Time, Cupid, the Easter Bunny, the Tooth Fairy, and the Sandman.
To cover for Santa's prolonged absence, Curtis helps Santa create a life-size toy replica of Santa, much to Bernard's horror. However, this replacement cannot find any grace or slack in his plastic heart for minor infractions by children the world over, having followed the Handbook too strictly. Toy Santa takes control of the North Pole with an army of life-size toy soldiers. He thinks that everyone is naughty, and he plans to give the entire world lumps of coal.
Because of the impending end of his contract, Scott undergoes a "de-Santafication process" that gradually turns him back into Scott Calvin. He has a limited amount of magic to help him. Scott attempts to reconcile with Charlie, who keeps vandalizing his school to get attention. He and Charlie both face the ire of Principal Newman when Charlie defaces the lockers.
Charlie confesses to Scott how hard it is for him that Scott is never around like other fathers, and reveals the stress he is under to conceal the secret that his father is Santa. Scott vows to try harder as a dad, and he and Charlie reconcile.
After a few failed dates, Scott finds himself falling for Carol, the school principal. He accompanies her in a sleigh to the faculty Christmas party, which turns out to be dull. Using a little of his Christmas magic, Scott enlivens the party by presenting everyone with their childhood dream gifts. He makes a special presentation to Carol, and, with his last remnant of magic, wins her over and they kiss passionately. However, she balks when he attempts to explain he is Santa, believing that Scott is mocking her childhood, until Charlie manages to convince her by showing her his magic snow globe.
Curtis flies in to deliver the news about the Toy Santa's coal binge. However, Scott has used up the last of his magic wooing Carol, and Comet has eaten too many chocolate bars. With a little help from the Tooth Fairy, Scott and Curtis return to the North Pole. Toy Santa wastes no time in subduing Scott, but Charlie and a now-believing Carol spring him free by summoning the Tooth Fairy to fly them there. Scott goes after the Toy Santa, who has already left with the sleigh, riding Chet, a reindeer-in-training, and they both crash back into the village. With an army of elves, Carol, Bernard, Charlie and Curtis lead a snowball war to overthrow the toy soldiers. Toy Santa is reduced to his normal six-inch height, Scott marries Carol in a ceremony presided over by Mother Nature herself, Scott transforms back to Santa, and Christmas proceeds as it always has. Scott and Carol have a three month honeymoon to go on the next day. In addition, Scott and Charlie reveal the truth to Lucy, Charlie's younger half-sister (the daughter of Laura and Neil) about Scott being Santa Claus.