Children should believe in Santa and the Tooth Fairy until they are about to go to school.  Say, five or six years old.  At that time someone will tell them it's all a hoax anyway, but it's good for them to develop an imagination.  So you tell them that it's like fairy stories, it makes childrens' minds broaden out so they can enjoy things like flowers and so on.  If you lie to them about anything else they always know, believe me.  So tell them as much truth as you think they can handle then tell them you have to save some of the story until they are a bit older and can understand it.