I always said Santa was "make-believe". I told them the truth. If I want them to be honest, I must be honest. If I had told them Santa was real, and they came to realize I was making it up, then would they believe in our heavenly Father? We cannot see our heavenly Father with our eyes, but I know He is real. I believe this causes confusion in a child's mind.
Christmas or The Nativity is supposed to be about the birth of the Savior of the world. Truth seekers long awaited and looked for this. It is supposed to be about the Christ, our Anointed One, the One who came to give us hope for the forgiveness of our sins, and a future in heaven (with Him !!!).