ANSWER: Knowing when to tell your child that Santa is not real is one of the most common problems parents have to face. Questions such as who (the parents, the school, friends, etc.) should tell your child this fact or at what age they should be told can come up. Deciding what to do can be tough, especially when adults are constantly pressured by the world to just "go along" with the Santa myth and pretend he exists. Some have the additional problem of deciding how to convey to their kids that the family, out of conscience, does not participate in Christmas.
This modern world has at its disposal an impressive array of techniques and methods in which to promote deception. It can effectively promote how "real" Santa Claus is and how "good" it is to participate in the trappings of Christmas. The pressure to conform can come from the media (e.g. TV, radio, newspapers, books, magazines, the Internet, etc.), entertainment (movies, plays, games, etc.), family, friends, church, the workplace, stores and even schools to name a few.
When my friend's child was young, he and his wife had to deal with the same problem as you have. They found that children learn more by example than by words. Years ago, while they walked in the shopping malls before Christmas, their family would invariably see several versions of Santa along the way. Since they did not celebrate Christmas, they would simply walk past anyone dressed as him without making any comments. One year a woman asked their five year old what Kris Kringle brought him for the holiday. He simply replied, "We don't keep Christmas."
If a child is about five years old or less (e.g. before they start school) they will not understand explanations for not keeping Christmas, such as its obvious non-Christian origins that pre-date the birth of Jesus. They will not be able to grasp why St. Nick does not exist no matter how it is explained to them. My advice for handling whether he is alive with someone so young is, for now, to avoid bringing up the subject. If you do not keep Christmas out of conscience toward God, you would do well to keep up the practice.
For kids who are of school age, the problem of trying to explain why a made up person really does not exist is not as hard as it once was. Kids are growing up today in a world that is profoundly different from what it was even in the late 20th century. Children as young as three are learning to use a computer mouse to take advantage of a computer's teaching ability. Schools have computers for their students to use not as a luxury, but as a necessity, in order to teach and introduce them to the technology-based world in which they exist.
What does all this mean concerning telling your kids the TRUTH about Santa instead of lying to them (which you do not want them to do to YOU)? Children, even at an early age, are exposed to a whole host of characters that look, speak and act just like humans but are creations of someone's imagination. Whether in Internet games, educational software used in schools, cartoons, movies - even in story or coloring books - kids of school age are usually very familiar with interacting with countless fictional (pretend) people.
Explain to your children that just like their favorite Disney character (Cinderella, Tinkerbell, etc.), or cartoon character, or the people in their favorite electronic game, Santa is not real. Tell them he is a make-believe individual created by some humans for the enjoyment of others like themselves. Assure them that seeing someone dressed up like him in a store does not mean he is literally alive, any more than shaking hands with someone made to look like Mickey Mouse means that character is alive.