The Legend of the Titanic/WMG

Tentacles=Eldritch Abomination
It's a giant octopus with a dog's face. What more do you need to know?

They were on dope when they made this movie
It would explain so very, very much.

Alternatively, the story is the result of the narrator's delusion.
Unable to believe that a tragedy like the Titanic disaster could have happened, the old sailor mouse dreamed up an alternate reality where everyone survived the sinking to cope with the trauma.

It's either this or he was trying to protect his kids' innocence - which might backfire when they find out the true story.

Of course he made it all up, though my theory is that he suffered a head injury and did not actually witness the sinking. After all, if everyone did survive, why would the newspaper say "Tragic Ending to the Maiden Voyage of the Titanic: Hundreds Missing" and not mention anything at all about a giant talking octopus suddenly surfacing in New York Harbor?

This film started out as a serious effort.
There are shots of women crying and even a throwaway line to the "heroes who gave their lives for the rest", as though they began making a serious film about the sinking. Then, the producer said "hey, throw in a octopus" and the animators took him seriously.

This movie once existed in the Sonic the Hedgehog universe
But Sonic 2006 erased it from continuity. The various amounts of Artistic License would fit in with Sonic 2006 perfectly.