老师说的是对的，句子中的when they can dress up and go to their neighbours’ homes to ask for sweets 是 when 引导的定语从句，修饰 festival。

festival 后面完全可以接 when 引导的定语从句，这里的 when 相当于 on which。即：

It is now a children’s festival, on which they can dress up and go to their neighbours’ homes to ask for sweets.