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The story begins when Mr. Hiram Otis, an American minister, buys Canterville Chase, an old mansion situated deep inside rural England, notwithstanding warnings from the owner Lord Canterville that the house is haunted. He dismisses the ghost as a figment of English imagination, though the Lord tells him firmly that the ghost exists and several of his family members and also the Rector of the village church has seen and been terrorized by it. Mr. Otis refuses to listen and says that according to the laws of Nature, ghosts cannot exist. He completes the purchase and shifts with his family to the house.
The Otis family comprises Mr. and Mrs. Otis, their daughter Virginia, twin boys (often referred to as “Stars and Stripes”) and their eldest son Washington. At first, not one member of the Otis family believes in ghosts. When Mrs. Otis notices a mysterious red mark on the floor, she simply replies that she does “not at all care for blood stains in the sitting room.” When Mrs. Umney, the housekeeper, informs Mrs. Otis that the blood stain is indeed evidence of the Ghost’s presence and cannot be removed, Washington Otis, the eldest son, removes it with Pinkerton’s Champion Stain Remover and Paragon Detergent.
But soon they can no longer deny the presence of Sir Simon Canterville’s ghost. The family hears clanking sound of old and rusty chains, wearing which the terrible-looking Ghost haunts the house and scares the residents at night. They also find that the bloodstain on the floor, just where Sir Simon murdered his wife Lady Eleanor de Canterville three hundred years ago, reappears even after it is wiped off. Later, they see strange apparitions in various forms. But, amusingly, none of these scare the Otises in the least. In fact, upon hearing the clanking noises in the hallway at night, Mr. Otis promptly gets out of bed and sensibly offers the Ghost Tammany Rising Sun Lubricator to oil his chains. A quick fix, like the Pinkerton's Champion Stain Remover, Paragon Detergent and Tammany Rising Sun Lubricator — practical ways of dealing with an unearthly problem — this is the patent American approach to life.
The Ghost goes about his job of terrorizing people with a theatrical style and skill. He takes up a number of dramatic roles in his attempts to upset and terrify the Otises. He has the ability to change forms, and possesses a long collection of tricks. He takes the role of ghostly apparitions such as a Headless Earl, a Strangled Babe, the Blood-Sucker of Bexley Moor, Jonas the Graveless, Suicide's Skeleton, and the Corpse-Snatcher of Chertsey Barn. All these have succeeded in frightening previous residents over three centuries. But none of them works with these thoroughly pragmatic Americans. Despite the Ghost’s attempts to appear in the most gruesome guises, the family refuses to be frightened, and Sir Simon feels increasingly helpless and humiliated, being repeatedly befooled and made fun of by the twins.
He devises various ingenious schemes, but even as his guises become increasingly gruesome, his antics fail miserably to scare the Otises who thwart his efforts and outwit him every time. Not only that - they continue to humiliate him repeatedly. He falls victim to trip wires, pea shooters, butter-slides, and falling buckets of water. In a particularly comical incident, he is frightened by the sight of a ghost, a contraption put together by the mischievous twins. The tables are turned against him. He becomes so badly scared of the two mischief-mongers that he flees whenever and wherever he apprehends their presence to be likely.
The story is told in the second half by the Ghost himself. Following his narration, we come to understand the complexity of the ghost’s emotions. We see him as an evil scheming figure at first, bent on harming innocent people. He changes successively into a brave character, and then gradually as a humiliated, distressed, scared, and finally, depressed and weak soul. He exposes his vulnerability during an encounter with Virginia, Mr. Otis’ fifteen-year-old daughter. Virginia is different from everyone else in the family, and Sir Simon recognizes this fact. He tells her that he has not slept in three hundred years and wants desperately to do so. The ghost reveals to Virginia the tragic tale of his wife, Lady Eleanor de Centerville.
Unlike the rest of her family, Virginia does not reject the Ghost. She takes him seriously; she listens to him and learns an important lesson. She discovers the true solution to the riddle of the Ghost’s existence in the house. Sir Simon de Canterville says that she must weep for him because his own tears have dried up long ago. She also must pray for him, as he has no faith. Then she must accompany him to the Angel of Death and beg for Death’s mercy upon his soul.
Virginia does weep and prays for Sir Simon. Then she disappears with the Ghost through the wainscoting, goes with him to the Garden of Death and there she bids the Ghost farewell. Then she reappears at midnight, through a panel in the wall, carrying jewels and the news that Sir Simon’s soul has passed on to the next world and his ghost does not reside in Canterville Chase any longer. Virginia’s ability to believe and understand Sir Simon leads to her enlightenment. She tells her husband several years later that Sir Simon helped her understand “what Life is, what Death signifies, and why Love is stronger than both”