I'm slightly on the fence with this. Your sister has clearly behaved very badly with the 5 week strop- if she's upset, surely she could explain why and have an actual discussion about the issues.
But...I do think the charity donation/gift thing could have been better thought out. Like it or not, gift giving is a big part of Christmas for most families, and many people would feel very uncomfortable turning up without a gift, particularly for younger members of the family. So there's a real chance that other adults in the family will still feel the need to buy for your son. Adults without children of their own are unlikely to feel hard done-by if they go ahead and buy your son a gift and receive nothing in return, but your sister may feel put out on behalf of her own children who will be used to receiving gifts from their aunt.
That doesn't make them grabby or entitled - they've grown up with a particular Christmas set-up and it's suddenly being changed by one individual, without prior discussion. It also feels like there's a slight undercurrent of judginess about your nieces and nephews and how much they already have. You are still buying gifts for your own son, but you don't feel that you need to buy for the other close family children because they have so much.
Christmas is a big thing in most families. I think it was unwise to make a unilateral change to what is, after all, a fairly normal and traditional set-up - people give and exchange gifts, and presumably enjoy doing so.
There's also the fact that it may make others feel as though you think they should be doing the same. I'm not saying that you do think that - but if someone announces that they're making a fairly large charity donation in lieu of gifts, it's likely to make some people think 'Shit, do I look tight for not doing the same?' Again, it is something that should, perhaps, have been discussed in advance, rather than announced as a fait accompli.
It's a lovely thing to do, and I don't think you were wrong to do it. But I do think it should have been approached differently, and probably with the children excluded, even if their gifts were scaled back slightly. The exchange of gifts is about more than what the recipient 'gets' and it may well be that the sister is more concerned with that side of things than with the material aspect.