Honestly, for the vast majority of children I don't think it matters what you tell them. Personally I find it interesting to lie and see what age they figure it out at. I regularly lie, use sarcasm, tease, etc... to children as a way of messing with them, as one might to a gullible friend. It's a game, and I think young children benefit from being exposed to a rich behavioral repertoire.
However, I can imagine a certain sort of child who takes it a little too seriously - so you basically have to use discretion. Never, ever tell a real lie to a child, where something real is at stake, if you want them to trust you. If you think the kid is putting real importance to the idea of santa such that they'd actually be upset when they figured it out, don't lie to them. Don't take the game too far.
I guess it helps if the child knows that you are in the habit of tricking them into believing ridiculous things and playing mind games, as is often the case for kids who I associate with. That doesn't mean that the children know it's a game - I often say things that are true but sound ridiculous to avoid that situation. It's that they are uncertain about whether I'm telling the truth or that I'm messing with them, and that uncertainty is in itself a game.
It start with little lies like "I ate your toy...oh wait, it's coming out of my ear" and gradually escalates to more plausible things like "there's a rabbit leaving chocolate eggs everywhere". You're aiming for a situation such that they're comfortable with it and when they figure it out, they feel like "Gaah you got me" rather than hurt. And then they keep playing along.
It seems like fathers everywhere do this thing about where they tell lies to their children to see what they will believe. Is it that universal? If so, does that say something about it being hardwired?
My own favorite one was from when I took my kids and my parents to eat at a restaurant. My daughter, who was about two, loved macaroni and cheese. She was hungry and discontent at how long the food was taking. My father calmly explained to her that it took a while for the cooks to "pull all the little legs off the macaronis." Her eyes got big and started to tear up as she presumably visualized macaronis having their legs pulled off. A quick retraction was in order. I doubt she was indelibly scarred.
Related: The Santa deception Is Santa real On the care of young rationalists
All of the other takes on this topic start from a point, when a child (usually 5-9 years old) asks "Is Santa real?" Nobody yet asked "how to raise my child Santa-free?" What to say, when a two-year-old, who just noticed that there is this character on TV asks "will he come to me, too?" A toddler may not yet understand the concept of lie, of pretending, of things not physically existing. How to tell her, what will happen, what to expect, how and why other children behave differently?
My three-year-old daughter discovered Santa last spring, which finally forced me to think: how to deal with it? Ignoring the thing worked for three years, but what now? I live in an extremely catholic country (Poland), so I cannot be completely blunt about it.
In the end I decided to call it "the fairy-tale of [Santa] Claus." For me it has a lot of advantages: this is a story that can be told, retold, reinvented and everybody knows it. In addition, since the name includes the phrase "the fairy-tale", it has just as much validity as the tale of the Red Riding Hood or any TV character that she likes.
I tested some of her beliefs about "Miko". I opened the box with books intended for gifts in front of her. When she wanted to read some of them, I explained that she cannot yet read her book, because she'll get it on Christmas Eve. She asked "is it from Miko?" and I replied that in some way it is, but I bought it. She didn't insist on reading it right now. A few days ago she helped me wrap some of the gifts. She commented that action "Miko brought these so we can wrap them and give them as gifts from Miko."
Malcolm told me, that he likes best the strategy, when you say that Santa Claus is a game that everyone plays. People pretend that there's a big guy in a suit who does the thing, and if you ever let down the pretense to your friends, you lose the game. I'm not entirely convinced by this strategy - it may be too complicated for a 2- or 3-year old (since my daughter didn't wrap her mind around the information that I bought the books).
What are other strategies that you use? Or which ones you don't like? Why?