The questions here are really:
1-What is my obligation to celebrate Christmas with my family?
2-What sort of exposure to “bad family” will be harmful to my children?
3-How *should *my family celebrate Christmas?
So for #1 - You don’t HAVE to celebrate Christmas with your family, but if you are in the same town as them, it would take a really good reason (IMO) to completely avoid your close relatives. I know my parents would be very hurt if I decided not to see them at all on Christmas.
For #2 - First question. Do you believe that this person might try to give illegal substances to your children on Christmas? If yes, then you have a great reason to stay away, regardles of whose feelings are hurt.
If not then we move on to the next question: Is this person likely to command alot amount of time on Christmas proclaiming her views on Christmas? If yes, then you’ll look for ways to shield your kids from that, perhaps by not going, or perhaps by just going in another room when it happens. Or even by telling her outright: “We are celebrating Christmas today. That’s what we’re all here for. If you don’t want to celebrate Christmas, then you didn’t need to come. But otherwise I’d appreciate it if you’d keep your criticism of our faith to yourself.” (I know, blunt, you could soften it a bit I suppose)
If none of these two things are going to happen, then your kids are not going to be any worse off by seeing her on Christmas Day. This is a relative that you understandably don’t want your kids to have a close relationship with. But one afternoon visit at Christmas does not a relationship make.
Also, if the conversation isn’t completely focused on her and her beliefs, then her presence can’t ruin Christmas for you unless you are focusing yourself on it. I had atheists at my Christmas celebrations for probably 15-20 years at least. Never once, did it become an issue, because we didn’t talk about our belief systems over dinner. We said Merry Christmas, they politely waited while we said grace, and we had a lovely time.
For #3 - This is the part you have to decide. Of course, you need to find a way to make it meaningful for you and your children. If this dinner is keeping you from being able to have meaningful traditions with your family, then maybe you need to skip it. Or maybe you can work around it - after all, Dec.25 is 24 hours long, and there is Christmas Eve, and the other 12 days of Christmas too.