The empty water bottle is the second inventory item you come across (after the padlock). You can find it in your bedroom on the shelf next to the door. It can be picked up in chapter 1, once you wake up at night to recover the padlock from the freezer door, but it only becomes useful in chapter 6.
You can fill it with water at any faucet in the house. Thusly it will become a "Filled water bottle" and it will aid you in ruining everybody's Christmas Eve.