"Respect Others Beliefs" means that you don't tell other people that they are wrong or act like they are stupid, even if you strongly disagree. There are situations where debate may be appropriate but 5 year old kids don't know how to debate respectfully and not make the other person feel bad or hostile. Even adults have enough problems with this. So my advice to my kid would be to just keep their mouth shut and let the other kid believe what they want about Santa or fairies or God or Buddha, or whatever. If religion ever enters the conversation and the OP's child tells another child they are "wrong" for X,Y,and Z reasons, I can guarantee all hell is going to break lose, with the child probably being alienated and other parents being very angry. It's bad enough just with the tooth fairy or Santa.
The thing is, Santa really isn't real. I mean the whole story is indeed a fraud as is the tooth fairy and everyone does find this out sooner or later. That isn't the same as a religious belief - santa and tooth fairies are indeed provable fraud. My DS makes this distinction easily and I think it is indeed an important one.
