The best thing is to be honest and simply tell her that she won't be seeing her grandmother this Christmas, because Grandma is no longer alive but has gone to be with Jesus in heaven.
By now, your daughter probably understands that living things don't keep living forever; perhaps she's had a pet die, or has seen life come to an end in some other way. She'll be sad over her grandmother's death, and may even ask you some questions you won't know how to answer. But don't let that bother you, and don't get too complicated in your replies. For now, it's enough for her to realize that her grandmother is in a far better place, and all her pain is over.
Death is a harsh reality, and it's not easy to expose our children to it. But use this as an opportunity to teach your daughter about Jesus, and how He came into the world to forgive us and take us to heaven. This was her grandmother's hope -- and it can be hers, as well, if she'll ask Jesus to come into her heart. The Bible says, "To all who received him, to those who believed in his name, he gave the right to become children of God" (John 1:12).
In addition, as Christmas approaches take time every day to talk about Jesus and why He came. Because of Him we can have hope -- hope for our lives right now, and hope for eternity in Heaven. Is your faith and hope in Him?