Yes, what you describe is EXACTLY the issue I've been dealing with for a number of years.
Sails smaller than about 2.5 m2 have the CE of the rig so close to the mast (only a few inches at the most) so on many board, it's impossible to get the mast foot far enough back (over the leading edge of the centerboard) to get the CE to align over the CLR of the centerboard/fin combination.
Some folks try very small fins, but I have never had much success with that.
I did some fairly objective testing about 5 years ago with the Aero 115 that had a removable center fin.
I made a 6" wide board with a short piece of aluminum mast/finbox track bonded down the center.
With really small sails (the smallest in the test was a Sailworks 1.2 m2 Retro Ripper) I found that by extending the mast box back over the center fin, the tiny sails could finally develop enough CE/CLR balance that the board would actually sail upwind about twice as well.
So, put the mast foot all the way back, try a smaller fin in the back, but the real answer is to extend the mast box back to put the mast foot virtually over the front of the centerboard.
Then the CE and CLR have a chance of balancing (to go straight ahead) and when you rake the rig back a little the CE move behind the CLR (before you get it so far back that the sail no longer has any drive).
Have you tried your kids on larger rigs.
I find that the Sailworks 1.7 and 2.5 Retro Rippers (on appropriately shortened Rip Stick masts which are very light) most 8 year olds have no problems uphauling the 2.5 m2 and most 5 year olds do pretty well with the 1.7 m2.
Hope this helps,