Hi A.,
First, I'm sad to hear your news and know how you all must be hurting. Losing a family member- be it even a pet- is very, very difficult.
I believe that in being a child... especially one so young like your son... they are so much closer to truth, to understanding, and to innocence. They are so much closer to all that is where your dog returned. The children being born these days are not stupid; at times they understand more than we think they do and for more than they are given credit. I think if you explained gently and as simply as possible for now to your son, that it was time for your dog to go live somewhere else... perhaps up by the moon or in the stars~ a place he can look up to and see and talk to, then he will always know where his doggie is. You can also draw pictures for your dog with your son and attach them to the string of a helium balloon that he can let go of as if he's sending the dog mail to the moon/stars; or simply even put special hugs into a balloon, or let him tell what he would want to tell the dog and then let it go. Every now and then, as you're out doing your daily business, you will see other helium balloons float randomly through the air which is really cool! THOSE, you tell your son, are from the dog!! :). My kids ALWAYS love the messages back. :)
My suggestion may sound a bit wrong to some, however, when my Aunt passed away right before Christmas of '06, my daughter had a most difficult time for a long time, however, she has always found peace and joy in being able to include Aunt Kat in family functions and celebrations by sending her balloons. It is comforting to her when all she has to do is go outside and look up in the sky and yell something to her, and know that Aunt Kat is home resting above my daughter everywhere she goes. Now my Grandma has joined my Aunt. This time around it wasn't so bad for my daughter or my 2 year old son because Nana was going to a familiar place they could comprehend. They know God and Heaven... but when you're little and you can't see past the stars in order to understand the ALL of what's out there... of Creation... how will a little 2 year old perceive that and be comforted because his dog is somewhere unfamiliar to him and so far away?
Without knowing your son, it's hard to say, but if he asks you, answer honestly. Be happy for the dog... maybe he was hurting? Maybe he had an extra special job to do and had to leave so he wouldn't be late??? I don't know. If a child can understand something simple enough, I don't think he'll ask too many questions.
Sorry. I hope this helped a bit :)
Blessings,
Jennifer