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Christmas is a wonderful time to visit Banff, where it's a white Christmas every year. Businesses and houses alike are decked out in amazing displays of Christmas lights, and the interior of the Banff Springs Hotel is full of Christmas trees and festive decorations, while its courtyard may showcase ice sculptures.
Although the ski areas are busy during the Christmas-New Year's period, the lift lines are not horrible; a 15-minute wait is the most you're likely to encounter. Non-skiers will find that there are lots of opportunities for Christmas shopping in downtown Banff. Although most of the museums are open in the winter, the smaller ones (Buffalo Nations, Banff Museum) have shortened hours (usually 12-4 or 1-5). However, the Whyte Museum is open 10-5 every day, except for Christmas Day and New Year's Day.
Nearby ski areas (Mount Norquay, Sunshine, Lake Louise) are open on Christmas Day. You may even see Santa out on the slopes! Going skiing on Christmas Day is a locals' tradition. Operating hours may be slightly shortened on Christmas Day.
Some restaurants will be closed on Christmas Day (e.g. Rose & Crown), and some hotel restaurants (most notably, those of the Fairmont Banff Springs) may be open only to registered guests. Others offer special Christmas Day dinners (e.g. Giorgio's). Check TaxiMike's listing or Banff Lodging Co's listing for further details.
The intersection of Banff Avenue and Caribou Street is where everyone gathers for the final countdown - it is Banff's Times Square.
Banff has a wonderful fireworks display at midnight -- you can watch it from downtown.