When my son was born my husband and I weren't terribly excited about the whole Santa Claus story, though I had very much enjoyed it as a child, growing up in an unbelieving home. Other relatives, however, were quite invested in Santa Claus, so I sat back and let them do their thing. I read Adam The Night Before Christmas, but beyond that I don't recall ever actually telling him there was a Santa.
When he was about five, we were driving in the car around the Christmas season, and he asked me if Santa was real. I asked him what he thought. He said he didn't think so. How could Santa deliver all those presents to everyone in all the world in a single night? (As a child, I recall being troubled by how he was going to slither under the door, since we had no fireplace and chimney.) I said that was very observant of him, and no, Santa wasn't real. That was the end of any active belief in Santa for my son, though "Santa" still continued to visit on Christmas eve for some years...
On that subject, and a related one -- ie, that children are unable to distinguish fantasy from reality, a claim which parents who object to fantasy stories evoke as justification for condemning them -- my friend Ed Willett has an interesting post on his blog today, What's Real and What's Pretend . It's about a study done at the University of Texas that challenges child expert Jean Piaget's 1930 statement that "children consistently confuse fantasy and reality, the mental and physical, dreams and reality, and appearance and reality. " In fact, according to this study, they're pretty darn good at figuring out what's real and what's not.