This episode opens on a foggy night in London, England. Fatcat and his cronies are sailing up the Thames in a boat tethered to a barge, while the Rescue Rangers follow in the Ranger Plane. Fatcat is, we soon learn, heading for the Tower of London, where he plans to steal the Crown Jewels.
Arriving at the Tower, Fatcat and his gang enter via a secret passageway. When his stooges ask why they don't just go to the museum if they want the Crown Jewels, Fatcat tells them that he "knows a little secret" about them. However, he won't say what it is and simply orders Meps, Wart and Mole to follow him. Moments later, something pulls a rug out from under Wart's feet and sends it flying into Meps' face. Then, a helmet falls onto Mole's head; when Fatcat demands to know what is going on, Mole says it was a ghost. But Fatcat retorts that there is no such thing and warns his stooges to worry about the Rangers, who "always seem to show up and spoil his fun".
The Rangers, meanwhile, arrive at the Tower and, unaware of the secret Fatcat knows, check out the museum. Chip notes that the Jewels look pretty well-guarded and, when Dale asks what the Rangers are doing here, replies that "they [the guards] don't know about Fatcat". Just then, Gadget notices that Monty and Zipper are missing.
She and the chipmunks find them by a painting of a man with a mouse at his side (judging by the style of the subjects' clothing, it was painted sometime in the 17th century). Monty says the mouse was his ancestor, Sir Colby, who, so Monty claims, once scared off the vicious Canterville Cat.
As it happens, the painting is right over the secret passage Fatcat and his cronies are in and there are holes where the man's eyes should be. Fatcat, peering through them, spots the Rangers and warns his gang to keep quiet, as Meps and Wart take up position at the spy-holes. But, moments later, Mole decides that he wants a look too and a quarrel breaks out between him and Meps. Chip, hearing voices coming from behind the painting, directs the others to look for a way in.
Zipper, investigating the painting, accidentally pokes Mole in the eye. He then flies into the passage and spots Fatcat and his gang. Fatcat realises the game is up and tries to grab Zipper. But Zipper escapes and reports back to his friends, who start looking for the secret door. As they do so, Sir Colby's ghost emerges and starts trying to scare them, without success; even when he tries moaning down Gadget's ear, she thinks it is just Dale complaining.
Sir Colby breaks down in tears and tells the Rangers that he is a coward. He did not scare off the Canterville Cat; rather, it scared him into deserting his post and he is now cursed to haunt the Tower. The only way the curse can be broken is if one of his descendents does a brave deed in his name. Chip asks him how to get into the secret passage, but, before the Rangers can do so, the door to the passage opens and the ghost of the Canterville Cat emerges. Monty flees and, as the Canterville Cat pulls off its head and throws it at them, Sir Colby and the other Rangers follow suit.
Monty is on the verge of hysteria. He says he can handle most cats and he can handle ghosts, but a ghost cat . . . Gadget chides him for believing in ghosts, apologising to Sir Colby when she remembers that he is a ghost. Sir Colby says he "hasn't believed in himself" for a while, to which Chip replies that he won't break the curse thinking like that. This prompts a display of mock bravado from Monty, whom Chip and Dale try to restrain as Gadget slips back out into the hallway. Fortunately, the Canterville Cat is gone.
Sir Colby leads the Rangers to the Crown Jewels, explaining as they head up a passageway that what the Rangers saw in the museum were simply glass imitations. The real Crown Jewels are kept in a secret room at the top of one of the towers. Arriving in the room in question, Chip, Dale and Gadget jump down onto the piles of gold and jewels, just as the Canterville Cat sneaks up behind them. Monty, who is still on the beam his friends jumped off, warns them of the danger but is too afraid to do anything about it. He and Sir Colby flee as Chip, Dale and Gadget try to escape by hiding in among the gold coins. Moments later, Fatcat scoops the three rodents up in a box and we learn that the "Canterville Cat" is really a costume worn by Meps, Wart and Mole.
Fatcat takes the captive Rangers to the torture chamber, where he straps them into a guillotine-like device called a crew-cutter. As the water in a special cup attached to the crew-cutter drips out, the blade will be lowered until it slices the Rangers in two. Fatcat taunts them and leaves as Gadget tries to assure Chip and Dale that Monty will save them.
Meanwhile, Monty and Sir Colby meet up on the roof. Dejected, Monty says he is "nothing but a shivering yellow-belly". Sir Colby then reveals that he let his friends down with his cowardice, which is exactly what Monty has just done. Hearing this, Monty realises the enormity of leaving his friends to their fate and resolves to save them, ghost cat or no ghost cat. The pair head back inside, where they encounter the "Canterville Cat" heading downstairs.
Monty leaps at the "Canterville Cat" and gives "it" a good beating before sending "it" tumbling down the stairs. Meps, Wart and Mole escape from the costume and flee as Monty, still unaware that it was only a costume, crawls out from under it. Moments later, Zipper flies up to Monty and tells him that the others are in the dungeon. Monty sends Sir Colby to deal with Fatcat, while he saves his friends. In the dungeon, Zipper struggles to keep the blade from descending any further, while Monty rotates the table Chip, Dale and Gadget are strapped to so that he can get at the buckle. Before he can unfasten it, however, the blade slams down. Fortunately, it misses the three rodents.
Meanwhile, Sir Colby confronts Fatcat and orders him to remove the crown he has stolen. Fatcat immediately does so and, unaware that Sir Colby is a ghost, slams it down on top of him, asking if he would like to join Chip, Dale and Gadget in the dungeon. At this, Sir Colby floats out through the crown, denounces Fatcat as a fiend and pulls a scary face at him. Fatcat flees and the curse on Sir Colby is broken, meaning he can finally depart to the afterlife.