The 74-year-old icon was especially eager to have her goddaughter feature on the record because she knows she's unlikely to ever make another festive-themed album.
Dolly - whose record is called 'A Holly Dolly Christmas' - said: "She had to sing on this Christmas album.
"She was working on her own project and I said, ‘I’m not going to ask you to put it out as a single, I know you got your own thing, but you have to sing on this album with me - you and Billy Ray, because you’re like family, and I’m probably never going to do another Christmas album.'"
Dolly has also recorded a track with Michael Buble and although she wasn't able to spend time in the studio with the chart-topping star, she's looking forward to catching up with him once the coronavirus crisis eases.
Dolly told 'ET Canada': "We did talk a lot you know on the phone and all the zoom stuff that you do. When life is good again, I’m going to get with all these people."
Other big-name stars who feature on the album include Jimmy Fallon, Billy Ray Cyrus and Willie Nelson.
And although Dolly hasn't been able to release a Christmas special this year, she's hopeful it might happen in 2021.
She shared: "I said maybe next year, I can get with all these artists and we can revive the album for Christmas next year and add some new and additional things and make a special.
"I believe in rolling as you go, you can’t give up, you just fit yourself into anything that’s happening. Be as productive as you can be."