The Toy Santa was created by the Keeper of the Book elf, Curtis, to replace Scott Calvin while he was away, against the wishes of Head Elf, Bernard. Initially, although he had a considerable edge compared to the real Santa, he seemed to be doing his job okay. However, as he memorized the handbook and rules of being Santa, he began following the handbook too strictly.
Upon double-checking the naughty-nice list, he deemed all the children of the world naughty for their occasional mistakes. Upon this, he went crazy creating an army of life-sized toy soldiers, and announcing that he planned to give all the children of the world a lump of coal, and Bernard and Curtis were powerless to stop him.
When Scott Calvin returned to stop him, the Toy Santa rode off in his sleigh, then Scott went for a ride on Chet the Reindeer to go after him, then the elves captured him and turned him into a small toy.