I see the parents giving the damaged hat to the older sister as a punishment, too, not a reward. I know 5-year-olds who would absolutely understand that this was a punishment, and wouldn't normally wear damaged hats. Now it's possible that by now the older sister is fine with the hat, but you don't know whether or not it started off as a punishment.
I don't think it's your place to say anything to the parents. You can modify your gifts next time, such as telling the older sister that the hat is her gift, but I don't see what good would come out of talking to the parents about it.