The key error in the substitute teacher's analysis is that this is literature. It is NOT claimed to be true. To teach the story is not to claim that it is true, any more than to teach Tom Sawyer is to claim that IT is factually accurate. This teacher could easily have avoided the issue of whether Santa Claus is "real" by directing the students to their parents. This would have illustrated a sensitivity that is generally expected of teachers, especially teachers of very young students.
Right on target. Unfortunately, substitute teachers can no longer be counted on being professional.