The agent was thinking of this perhaps:
Although you will be seated in either Premium Economy or Business Class when your upgrade is confirmed, your booking will remain subject to the fare rules and restrictions of the booking class and fare option you originally purchased. These rules include, but are not limited to, mileage accumulation, change and cancellation fees, access to airport lounges and baggage allowance.
https://www.aircanada.com/ca/en/aco/...onditions.html
When I re-read the post, it seems clear a passenger in domestic MLL should have had access as E35K. Maybe agent read the situation too quickly also!)