I am facing the same problem when I try to run this command. In Mycase my SharePoint 2007 content Database is not residing on the same server as that of my 2010 farm configuration database. When I ran the command "Test-SPContentDatabase" with Params Name& Webapplication I found that the SharePoint is trying to find the database on the Server hosting the Configuration database. Obviously It cannot find the database. When I provided the "-ServerInstance" parameter I was able to resolve this error.
Update: I got this error today even after specifying the ServerInstance Parmaeter and reassigning the permissions on SQL database. But I am able to resolve this issue by ruuning the following command.. Get-SPContentDatabase -ConnectAsUnattachedDatabase -DatabaseServer <SERVER\SQLInstanceName> -DatabaseName
