Hey BB ... how's the activist life?
I've used three of those buy one get one free (BOGOF) coupons over the last year and what the agent told you is correct or at least it was the same thing I was told the three times. The free ticket may not be upgraded but the purchased ticket may. This is actually better than it was the first time I used one when I was told they were about to implement a rule that said not even the paid ticket could be upgraded. Thankfully they never did.
Now I agree with you that you should be able to upgrade the free ticket using points (or the difference in points between economy and business). After all this was allowed with the the two free sun destination tickets from last year's promotion. I do see where Aeroplan is coming from but to try to explain it would take too much time ... and probably not make any sense to anyone but me! However, the point is that Aeroplan could do the upgrade for points if they wanted to.
And what Dorain says is also very true (is this a case of great minds thinking alike?) ... that you can still try at the airport, at each of the points he listed. The only thing I would add to that is to also try at each en route connection you have (yes, go out to the ticket counter and give it a shot!). On each of the first two free companion tickets I have used I was able to get my companion up graded on one of the main segments, both times the return leg. The third is yet to come and I hope I am as lucky!
BTW ... Dorian, using your SE upgrades for a travelling companion who has a purchased ticket is a bit different ... almost any class fare can be upgraded except those stated on the coupon (apparently even consolidator fares are okay).